The U.S. manufacturing renaissance is real. But is it real enough to make a big difference to the country’s economic recovery? Probably not.
Wal-Mart Stores Inc.’s announcement Tuesday that it will purchase an additional $50-billion (U.S.) of American made goods over the next decade added to the growing body of anecdotal evidence that the “reshoring” trend is picking up speed.
Apple Inc. said late last year that it would bring home some of its Asian production, and General Electric Co.has been building new factories in the United States for at least a couple of years. There are dozens of other examples. “Made in America” is back.
There are many reasons for the renewed interest in American factory production. One is the narrowing of the gap between labour costs in the United States, where the recession has dramatically lowered average wage rates, and Asia, where workers are demanding better pay. Klaus Kleinfeld, the chief executive officer of Alcoa Inc., told an audience in Washington Tuesday that wages essentially have become a non-issue in selecting locations for production facilities. “That’s so old school,” he said during a panel discussion on manufacturing hosted by the Brookings Institution. “It’s so not an issue any more.”
Another reason for the shift is a realization that it’s beneficial to locate production and research in the same place. (Engineers can come up with the whiz-bang ideas, but if they don’t translate to the shop floor, they only are ideas – and you can’t put ideas on a shelf.) And perhaps the most important factor behind the U.S. manufacturing resurgence is the country’s much heralded energy boom. Natural gas, a power source for factories, in the United States can be purchased at a quarter of the world price. That’s real money. A Texas facility that Alcoa once used mostly as a backup now is one of the company’s most efficient operations, Mr. Kleinfeld said.
Factory production increased 0.8 per cent in December, after a 1.3 per cent increase in November, the Federal Reserve reported Wednesday in its latest monthly review of industrial production. At 95.1, the Fed’s manufacturing index was the highest in December since the end of the recession. On the year, factory output increased 1.5 per cent.
All of this is to the good. But manufacturing can’t really be described as a major driver of economic growth in the United States. Factory production grew at an annual rate of 9.8 per cent in the first quarter of 2012, and then slowed dramatically to a rate of less than 1 per cent over the rest of the year, according to Erik Johnson, the U.S. economist at IHS Global Insight.
The domestic market isn’t as robust as it used to be, and U.S. exports haven’t yet made up the difference. The industry has added more than 500,000 positions since February, 2010, about a quarter of all jobs created during that period. Still, factories cut more than 2.2 million positions during the recession. Mr. Johnson and other economists are skeptical those jobs will be replaced any time soon. IHS predicts manufacturing growth of only 2 per cent in 2013.
That’s why the tone of the Brookings discussion on manufacturing was more hopeful than triumphant.
The factory renaissance faces barriers beyond sluggish economic growth. A recurring concern raised by Mr. Kleinfeld and his fellow panelists was a shortage of qualified workers. Greg Fischer, the mayor of Louisville, Ky., said 12,000 people applied for 1,000 jobs at a new General Electric plant in his municipality. Only about a quarter of the applicants had the skills for the jobs on offer, said Mr. Fischer, who has put an emphasis on training programs geared to employers’ needs.
A byproduct of the “offshoring” era is that the U.S. lost a generation of the highly skilled machinists that make factories run. This is an acute issue because the existing factory work force is aging. The problem is there aren’t a lot of replacements in the pipeline because younger students have no idea there are good jobs to be had in manufacturing, Mr. Kleinfeld said.
“You have to make manufacturing sexy again,” he said.