April 27, 2016
US manufacturing has seen a rise in the number of factory jobs in recent years. Is the industry finally seeing signs of an economic revival?
The factory of the future will have two employees. A man and a dog. The man will be there to feed the dog. The dog will be there to stop the man touching the equipment. Warren Bennis (1991)
Blue-collar factory workers, traditionally the resolute backbone of any economy, have always been seen as the stereotypical hard working, getyour-hands-dirty ‘grafters’. The US manufacturing industry has long been a giant of the increasingly globalized world, with its multi-million strong workforce and its eternally romanticized ‘American Dream’ ethos as the driving force behind it.
Except, that was then and this is now. The “then moment” came on September 15, 2008, when Lehman Brothers, the global financial services, with USD 613 billion debt, filed for bankruptcy. The largest write-off in US history, the fall-out was immediate. The event is now widely cited as the tipping point of the global recession that followed in the late 2000s. Its impact on global markets has continued to the present day.
The “now moment” might be the release of the full US GDP 2014 data, with manufacturing responsible for USD 2.1 trillion worth of output. To put this figure in perspective, if US manufacturing itself were a country, it would be the ninth largest, higher than its neighbor Canada, higher than India and Russia and on a par with the entire GDP of Italy.
PAST MEETS PRESENT
Taken from a long-term historical perspective, however, the 2008 crash was but one sudden downward lurch in a slow, steady decline since the early 1950s. Many other western countries have also seen a pronounced decline in manufacturing, so the US is hardly unique in this respect. But the reality still bites; in terms of manufacturing output, China overtook the US back in 2010 and the gap has widened since.
Desirous of seeing a swift US reversal of fortune, many financial media columns have claimed a resurgence since 2010. However, based on incomplete evidence, hopes have been swiftly dashed by the less-than-stellar performance data.
Numerous ideas for reviving manufacturing have been postulated too, yet most seem to be built on fatally flawed premises. The first premise is that the decline in factory jobs is a recent occurrence and the second is that the decline can be reversed through trade policy or tax cuts.
There are currently 12.3 million US factory jobs, representing some nine percent of the total US workforce, with a gain of some 900,000 workers since 2010. From this narrow viewpoint then, it appears cause for celebration. However, in the two-year aftermath of the financial crisis, around 2.3 million jobs were rapidly lost from the factory workforce. The numbers are sobering; manufacturing currently remains 1.4 million workers short of its prerecession total.
That said, manufacturing still remains by far the most important sector of the US economy in terms of total output and employment as in 2014 it supported over 17 million indirect jobs for a total nearing 30 million, both direct and indirect – more than one fifth of total US employment. Manufacturing mattered then and it still matters now.
STATE OF THE NATION
To late 2015 – and recent turbulent global financial and economic volatility notwithstanding – a cautious optimism is once again seemingly gaining traction in the US manufacturing sector.
Chad Moutray is Chief Economist at the Washington D.C. based NAM (National Association of Manufacturers). As the largest manufacturing association in the US, NAM represents manufacturers in every industrial sector and in all 50 states.
Of the current state of play, says Moutray, “In general, we have seen a rebound in US manufacturing and we can see it in a number of areas, especially the chemical sector, where we have seen a lot of investments flowing into the US, with much of that from Europe. We have seen manufacturing become much more lean, and in this recession, at least, it has had a nice tail wind behind it”.
That said, “The current environment is a very tough one,” says Moutray.
”The dollar is at least 20 percent stronger than this time last year, oil prices are dramatically lower and we have a lot of global weaknesses abroad, not so much in Europe, but definitely from China, South America, and even our largest trading partner Canada, which continues to struggle because it’s so dependent on the energy sector. Nobody is talking about the US manufacturing sector shrinking right now, it’s more a conversation of just simply growing a little less than ideal.”
One big catalyst behind the patchy upward trend is that escalating wages in traditionally lower-cost countries, particularly the ‘Asia factory’ region, have suddenly pushed US companies to reconsider their long-term outsourcing and bring production or ‘re-shoring’ back home.
“On a case by case basis, some of that is taking place,” continues Moutray. “China, for instance, has seen their costs going up pretty significantly, so producing in the US is more viable than it was 5 or 10 years ago. That said, we still have the highest tax rates in the world, which is not helpful for investment, and our regulatory policy is often looked at as being anti-business.”
FROM MACRO TO MICRO
From the micro-economic perspective of Konecranes, the macro-trend playing out in US manufacturing has both pros and cons. With around 90 locations and 2,300 employees across the US, its business is inextricably linked to the manufacturing sector.
Explains Mike Brown, Director of Business Development, Region Americas, for Konecranes, “The three cornerstones in terms of all our business units are the pulp & paper industry, automotive and steel. But while I see pockets of optimism, the market is not normal right now. Automotive is our hottest sector, yet the steel sector is down. Traditionally, those sectors used to go hand in hand. The service sector too, that’s where I also see a cause for optimism, not least in the routine maintenance in paper, steel and particularly automotive.”
With big machinery sales being sluggish, potential bright spots for growth are currently scarce. It is here though, where old age comes into play. With the majority of cranes in all US industries at least 40–60 years old, servicing can only go so far. At some point soon, these old cranes are going to need to be replaced or modernized.
Adds Brown, “In terms of cranes, one hot trend is that aluminum companies are entering the car industry in a big way. They will have to retool their stamping plants and facilities to handle the volume. Ford has done it, with General Motors and Toyota just behind. These companies are expecting to double their output, so it’s significant enough that they will have to make some capital investments for equipment that meets that type of volume requirement. So that’s a very positive sign I see.”
Continues Brown, “One of the trends in the US is that people are getting their college degrees rather than going into a trade, so there is a shortage and a lot of companies will be competing for them. Recruiting more skilled technicians and advisors will certainly be a future challenge for us.”
BRAVE NEW WORLD
As for the likely future scenarios regarding the industry in general, posits Moutray, “If I look at 2020, number one is the energy sector, and even though prices have continued to drop, you’re still seeing investments in chemical space, primarily because of feed start costs for natural gas that’s driving enormous investments in the manufacturing sector for chemicals, plastics and fertilizers. You’re seeing not just increased employment in these sectors but construction in those sectors is also up significantly too. I think we’re also going to see export levels from these sectors go up pretty significantly as well, primarily because 60 percent of the investments are coming from abroad with a lot of that from Europe.”
Another factor to note is the current drive to increase overall productivity in the manufacturing sector. With a determination to get more output from technology and innovation and lively discussion about the future Internet of Things, big data and 3D printing, for example, these are ‘adapt or die’ factors being touted as making manufacturing much more competitive, while also driving down costs and keeping the bottom line.
“With those trends, we’re really on the edge of seeing tremendous things for manufacturers over the next few years,” Moutray opines. “And in an ideal world, we would gain back another million factory workers by 2020, but even that would not bring us back to prerecessionary levels of employment.”
The reality then in the US manufacturing environment is that the fundamental nature of the industry is changing. The same goes for the situation in Europe, Japan and incrementally within the ‘Asia factory’ region. The new jobs will be very different from the jobs they are replacing. Workers will be much more expensive. Their skill level will be higher. Those employed in the future will be considerably more automated and digitalized. Manufacturing is, in short, likely to radically deviate from our more manual-labor based past and present. Is the manufacturing industry slowly and inescapably veering toward our ‘man and dog’ scenario?
Definitive US manufacturing predictions are currently thin. With growing questions over the depth of China’s slowdown amid weaker than expected Q3/2015 GDP results, this new reality is certainly going to have a dampening impact on the ability of manufacturing to grow faster in the US.
Furthermore, with weak and episodic European growth and the volatile global economic situation likely to continue through 2016, whether US manufacturing near term trends will continue northward, remains speculation at best. The optimism surrounding the industry in the longer term, however, appears noticeably more palpable.
Place your bets now.
Sources: Financial Times; Economic Policy Institute; Reuters; International Monetary Fund; The World Bank; Hall of Mirrors – Barry Eichengreen / Oxford University Press 2015
Text: Dan Rider