Dean Barber

Is a Manufacturing Renaissance Real or Hype?

In Uncategorized on April 7, 2013 at 7:09 am

For awhile there, I was feeling like a voice in the wilderness. I was going against the tide and still am to some degree. But I no longer feel so much alone.

Now others, with more credibility than me, are saying what I’ve been saying in this blog for more than a year. It was a Wall Street Journal last week from which I felt some vindication. Here’s the headline: “Signs of Factory Revival Hard to Spot.”

And here is the first sentence or the lead, which states it better than I ever have: “The idea that American manufacturing is on the cusp of a renaissance is everywhere these days – except in the hard numbers.”

As my friend Paulie on the Lower East Side would say, “badda bing, badda boom.”

But forget Paulie. He doesn’t read the Journal, but the Daily Racing Form. Let’s hear from Daniel Meckstroth, chief economist with the Manufacturers Alliance for Productivity and Innovation. This is what he told the Journal: “There’s simply no statistical evidence of a broader renaissance at this point.”

Now I’m not an economist, and I have never played one on TV, but that is what I have been saying, to the ire of some. More than a year ago, when I was taking this line of inquiry in my blogs, I received an email from some muckety-muck who said he had “lost respect” for me for not jumping on the renaissance bandwagon.

My reply to him was: “So you lose respect for those you disagree with?” If I took his extreme position, I might not respect myself, as I have been known to change my mind on occasion. I wonder if he can?

Remember What Was Lost

It is true that manufacturers have added more than 500,000 jobs in the United States since early 2010, but economists see those gains as too small relative to what was lost in previous years to suggest a full-blown revival. Let us not forget that U.S. factories lost nearly 5.7 million jobs from 2000 to 2010.

(By the way, of the those 500,000 jobs, only about 50,000 were due to “re-shoring,” according the Chicago-based Reshoring Initiative.)

Add to that the recent claims of the National Association of Manufacturing (NAM), which states that the U.S.-based manufacturers operate at a 20 percent cost disadvantage compared to our largest trading partners because of the current tax and regulatory climate that exists in this country. Now if your costs are 20 percent higher than your competition, you have a serious problem.

The advocates of a U.S. manufacturing renaissance suggest that low domestic energy prices, largely due to the shale oil-gas boom and the associated technologies with it, increasing productivity, and rising costs overseas would invigorate the production of goods in this country.

A Potential Game Changer

I actually do believe that our energy cost advantages can pose to be that game changer and will spark increased industrial investment in this country. Wood products, refined petroleum, and basic metals are manufacturing sectors in which energy is an overwhelming driver of costs.

It is therefore most economical to locate production in the places with the cheapest energy, even if the labor costs are high. Just look at the multi-billion dollar projects being announced with some regularity in Texas and Louisiana.

Despite the good news, yet another economist, Goldman Sachs’ Jan Hatzius argues that all of the signs reflect a recovery that is “squarely cyclical” and not structural.

“Evidence for a structural renaissance is scant so far,” writes Hatzius. “Measured productivity growth has been strong, but U.S. export performance — arguably a more reliable indicator of competitiveness — remains middling at best. And at least so far, there is not much evidence for large positive spillovers from the U.S. energy cost advantage to broader manufacturing output.”

If you look at the share of manufactured goods purchased in the U.S. that are imported, you would think that a revived U.S. manufacturing sector ought to be grabbing more of its home market. But there is no statistical evidence showing that happening, at least not yet.

Manufactured Imports Continue to Rise

Imports accounted for nearly 40 percent of the manufactured goods consumed in the U.S. in 2012 – slightly more than the year before. The share of imports has been rising for years. It was a mere 9 percent in 1967, when the government began tracking this measure.

Hatzius’ report would indicate that the strength in U.S. manufacturing output reflects more the relative weakness of Europe and Japan, rather than a long-term positive shift in the U.S. itself.

“Over the next few years, the manufacturing sector should continue to grow a bit faster than the overall economy,” notes the report. “But the main reason is likely to be a broad improvement in aggregate demand rather than a structural U.S. manufacturing renaissance.”

There have been a lot of studies in the past year on the state of U.S. manufacturing, where we are and where we are going. My favorite to date was published in November by the McKinsey Global Institute. It shows the importance of manufacturing to our future as a nation, but it also shows that what we usually think of as a traditional manufacturing job isn’t coming back.

A Reduced Need for People

Robotics and other technologies are eliminating the need for people. In the newest factories, you may see only a small number of technicians staring at computer screens, monitoring the work of the machines. Manual labor is nowhere to be seen.

“Manufacturing cannot be expected to create mass employment in advanced economies on the scale that it did decades ago,” concludes the McKinsey report.

Today, at least 30 percent of the new manufacturing jobs are things that would look to most people like white-collar service jobs: sales, engineering, and design. Lab coats have replaced lunch pails.

The manufacturing sector continues to be a mainstay of our nation’s economic productivity, generating $1.8 trillion in GDP in 2011 (12.2 percent of total U.S. GDP). U.S. manufacturing firms lead in exports. The $1.3 trillion of manufactured goods shipped abroad constituted 86 percent of all U.S. goods exported in 2011. Moreover, manufacturing has a larger multiplier effect than any other major economic activity – $1 spent in manufacturing generates $1.35 in additional economic activity.

Why Manufacturing Matters

“Manufacturing matters because it’s simply impossible to have a vibrant national economy without a healthy globally traded sector, and manufacturing is America’s most important traded sector,” wrote Rob Atkinson, president, Information Technology and Innovation Foundation in his Feb. 20 blog.

I have talked to Rob on several occasions and I think he usually nails it. We pick up from his blog:

“As Gene Sperling, Chairman of the White House National Economic Council, explained last year, ‘If an auto plant opens up, a Wal-Mart can be expected to follow. But the converse does not necessarily hold.’ Moreover, if the auto plant closes, the Wal-Mart will likely downsize or close as well. This is why studies have shown that every lost manufacturing job means the loss of two and a half additional jobs throughout the economy. Indeed, the anemic overall performance of the U.S. economy over the last decade can be tied directly to the loss of U.S. traded sector, and particularly, manufacturing competitiveness.”

Manufacturing’s value can be measured in many ways, but at the most fundamental level, it provides that we remain an innovation nation. As I have quoted two economists in this blog, I might as well quote a business professor from Harvard in support of my view that manufacturing, essentially, keeps us smart.

“Having a strong domestic manufacturing base is vital to the United States maintaining its world leadership in innovation,” wrote Willy Shih in his blog from last month. “That is because advanced manufacturing provides an important institutional foundation for learning and developing process skills and capabilities that are increasingly intertwined with core R&D in some of the industries most important to the country’s economic future.

In short, we have to make things to innovate and we have to innovate to make things.

As long as we can remain an innovation nation, we will stand a better chance for a revival, not just in manufacturing but in our hollowed-out middle class. That’s the renaissance that I am hoping for, a dignity restored to and wealth creation for the middle class. Manufacturing lends itself to that.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm in Plano, Texas — http://www.barberadvisors.com He can be reached at 972-767-9518 or at dbarber@barberadvisors.com

If you work for a company seeking site selection consulting or an economic development organization in need of counsel, ask for our separate brochures (pdfs) outlining how we can help. All requests for information will be considered confidential.

© Unauthorized use of this blog is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Dean Barber and Barberbiz with specific direction to the original content.

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  1. One of the key facts that escapes those manufacturing renaissance dreamers, aka Mr. President, who have visions of our dominance after WW II, is that Europe and Japan (our competition at the time) were in ruins, and not exactly in the competitive picture….. Its easy to be the big kid on the block when everyone else is sick. Not the case today… Not only for Europe and Japan historically speaking, but all the other new entrants that are strong competitors.

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