Figuring Out This Renaissance

So I am fast coming to the conclusion that this notion of a “manufacturing renaissance” in the United States is just a matter of semantics and maybe I should just leave it at that.

But here’s the deal: I keep reading about it and trying to discern what exactly the writers are referring to. What do they know that I am missing?

Now it cannot be denied that the state of manufacturing in this country has improved from what it was only a few years ago in the depth of a Great Recession. But isn’t that by definition what occurs following a recession? There is growth and recovery, although this one has been by historical terms very tepid. (See Feb. 9 blog, A Recovery at Half Speed.)

What makes this recovery so different by saying we are now in the midst of a manufacturing renaissance?

The manufacturing sector grew by 6.8 percent in 2010, the year after the Great Recession technically ended, outpacing the nation’s growth in gross domestic product of 2.5 percent. Increasing consumer demand in the U.S. and abroad propelled factory output. Exports grew 11.5 percent in 2010.

So Where is the Surge?

But a surge in manufacturing — as a share of the U.S. economy — has not happened. Growth in the manufacturing sector trailed the overall economy in 2011 and 2012, according to Commerce Department.

The pace of export growth has fallen since 2010 and net job growth at factories has slowed sharply in the past three years — from 207,000 in 2011, to 154,000 in 2012, to just 77,000 last year, according to the Labor Department.

While many folks are hoping for the domestic energy boom, rising overseas labor costs and stronger domestic demand (all of which I do believe are happening) to revive the long-stagnating manufacturing sector, a group of International Monetary Fund economists wrote a paper published in February that pretty much throws water on this notion of a renaissance.

“We find it unlikely for manufacturing to become a main engine of growth in the U.S.,” they said.

Still, the IMF economists said that the U.S. energy jolt, spurred by hydraulic fracturing technology that allows energy companies to tap massive domestic deposits of natural gas and oil reserves, could provide “non-negligible growth opportunities” for U.S. manufacturing when combined with further dollar depreciation and swelling consumer demand emerging markets such as China and India.

Earlier this month, a U.S. Conference of Mayors Advanced Manufacturing Task Force reported that metro area manufacturing employment has expanded by an average annual rate of 1.7 percent over the last three years, and that energy intensive manufacturing employment will expand by more than 1 percent annually nationwide through 2020.

Where Semantics Come In

Taking a historical perspective, which is what I like to do, manufacturing has posted a net loss of more than 9 million jobs since its peak in the late 1970s. However, it is important to note that labor’s importance in manufacturing has fallen off as automation continues to grow. That fact has resulted in the U.S. realizing substantial gains in output per labor hour in manufacturing from 2002 to 2012.

And here is where the semantics come in. If by “manufacturing renaissance” you are referring to manufacturing once again employing a large chunk of the population, well, don’t hold your breath. But if you see American manufacturing characterized by new products, higher productivity, more automation, well, then your renaissance is here.

A Congressional Research Service noted in a February report that “fewer than 39 percent of current U.S. manufacturing workers are directly engaged in production,” indicating the changing face of manufacturing in America.

A Minor Improvement

President Obama has often touted that in the last few years, 500,000 new manufacturing jobs have been created in the U.S. That is certainly true, and it represents great news for those workers who got those jobs, but in the context of the millions of manufacturing jobs lost, it’s a minor improvement.

But clearly this manufacturing renaissance, if it is happening, has not provided renewal to America’s middle class, because wages continue to stagnate. And it is my belief that our factory job wages have remained flat largely because plants today rely more on machines than people, as they (the machines) produce more for less. I write about this “Second Machine Age” in a blog back in January entitled “Can Manufacturing Spur a Jobs Revival.”

In a 2012 study, Jesse Rothstein, public policy and economics professor at University of California Berkeley, found that hires by manufacturers of durable goods (items lasting three years or more) were paid an average of 0.3 percent less in 2010 and 2011 than workers newly hired in 2007 and 2008.

Lower Labor Costs Here

The Boston Consulting Group surmises the U.S. is steadily becoming one of the least expensive countries in the developed world to manufacture. By 2015, average labor costs will be about 16 percent lower in the U.S. than in the U.K., 18 percent lower than in Japan, 34 percent lower than in Germany, and 35 percent lower than in France and Italy.

Now you would think such a discrepancy in the numbers would mean a resulting flood of manufacturing capital investment into the U.S., but that has still yet to happen in big way, despite all the re-shoring rhetoric. Certainly, there are examples of companies bringing back production to the U.S., but too often at wage levels that do little to rebuild a hammered middle class. 

In short, this story has yet to play out. Years from now we will know if this so-called manufacturing renaissance was real or a pipe dream.

Consultant Connect in Dallas

So the question was potentially unsettling, but I remained calm. No need to let anyone see me squirm.

“So how do you find your leads and how do you get paid,” an economic developer asked.

My first inner thought, which I kept to myself, was, “What makes you think we have leads and are getting paid?”

The attention was on three of us, three former economic developers who had gone over to the “dark side” by becoming site selection consultants. Consultant Connect was in Dallas last week, and I was one of 16 consultants talking about our craft to attending economic developers from around the country.

At a luncheon on the second day, Alison Benton of Aliquantus Consulting; Ray Watson of U.S. Consults; and yours truly – spoke on how and why we made the transition from economic development to consulting.

My reasoning on that question was supplied to me the night before at a reception where an economic developer told me how her board chairman had been pointedly asking why their community was not in front of Tesla making a pitch for the supposed future $5 billion gigafactory.

I could just imagine this man saying. “You know, we could use one of them gigafactories. You need to get out there and snag us one.”

And that, ladies and gentlemen, is one reason why I no longer practice local economic development. Managing expectations, keeping it real among stakeholders, is a crucial role for economic developers.

It is an area where I do believe that I can be of help to those economic developers who find themselves being asked questions by those who lack a fundamental understanding of what is doable and practical and what is not.

I joked that my career path was on a downward spiral – breaking bad from journalist, to economic developer, to consultant, with the next logical stop as an inmate in a penitentiary. (I assure you that is not my direction due to my deep-seated fear of showering near menacing men with tattoos.)

Indeed, I would recommend to any and all people that they should aspire to help others in need and refrain from criminal behavior unless they work on Wall Street or are elected to Congress. There, I realize such counsel would be pointless.

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 based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

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