US Manufacturing: Factors Driving the Resurgence

Nothing excites me more than the resurgence of US manufacturing. It’s comeback has a multiplier effect on the US economy, for every dollar in final sales of manufactured products, $1.33 goes into output.  This effect accounts for the largest multiplier of any sector in the economy.  I came across this article by Seeking Alpha and condensed it below.  The article describes the continued growth in US manufacturing.

(Read the full article at Seeking Alpha).

Factors allowing Growth

Energy

Over the past three years, our perspective that a resurgence of domestic manufacturing activity would be a silver lining for US economic growth.  This perspective has proven true despite the drop in energy prices.  The U.S. shale energy boom has played a significant role in the manufacturing renaissance story. The contributions have been both direct and indirect. The direct impact has been from the surge in demand for manufactured equipment and supplies necessary for the extraction and transportation of oil and gas. The indirect benefit has come from the cheap and abundant supply of natural gas that has been made available to the U.S. market as a result of hydro fracturing. The low cost of energy has also been an advantage for U.S.-based manufacturing versus other manufacturing locations around the world. This is especially true for heavily energy dependent industries and products which are expensive to transport due to size or weight like wind turbines. Despite the oil price decline, America’s energy boom could potentially spur a second wave of manufacturing jobs due to the ready supply of ethane, a natural gas liquid extracted with methane in the “wet gas” regions of Pennsylvania, Ohio, and West Virginia.

Less Supply Chain Issues

Even though the stronger dollar makes input costs cheaper for U.S. companies sourcing from abroad, weakening U.S. suppliers but benefiting U.S. manufacturers who use these inputs. Reasons for not using off shoring include these supply chain issues such as: supply chain length and complexity, risk of supply chain disruption, time to market, quality of products, rising emerging market wages, environmental concerns, inventory management, and intellectual property rights become more important in this globally competitive world. Over 80% of research and development (R&D) for U.S. multinationals still takes place domestically, and having the supply chain close to R&D has proved vital as the importance of time to market has increased.2  The top positive reasons have been the skilled workforce, brand/image, government incentives, automation/technology/3D printing, and U.S. energy prices. Most of the re-shoring cases have come from China, but a number have also come from Mexico and India.  For instance, it is now cheaper to spin yarn in the U.S. than in China, Turkey, Korea, or Brazil due to all the expenses listed with the supply chain issues listed above.

Skilled Workers

America’s pool of skilled workers goes much deeper than many other countries, making the U.S. an attractive place to manufacture. According to the Boston Consulting Group, 74% of companies moved production back to the U.S. in part to gain better access to skilled workers. Consumers are now pushing for products made in America, and a number of companies are bringing manufacturing back to the U.S. for brand/image reasons.

According to Harry Moser, the founder and president of the Reshoring Initiative, a decade ago the U.S. was losing ~140,000 manufacturing jobs a year to outsourcing. Today, it is gaining about 10,000 a year, pointing to the fact that the U.S. continues to have one of the most highly-skilled and productive workforce’s in the world. At the end of the day, cyclical and secular forces drive the growth of U.S. manufacturing even though oil prices and the dollar are cyclical headwinds, yet the more fundamental drivers of the manufacturing renaissance remain in place.

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