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OM in the News: Manufacturing in the U.S.–The Negative View

January 15, 2015

manufacturingExemplified by headlines such as “The Insourcing Boom” and “More U.S. Companies Are Reshoring,” the publicity for these cases has influenced public opinion and public policy. About 57% of U.S. manufacturing CEOs now believe that the U.S. is undergoing a manufacturing renaissance. But “the purported increase in the reshored jobs to offshored jobs ratio has not materialized,” writes Industry Week (Jan. 12, 2015). Around 30,000-40,000 manufacturing jobs are reshored while 30,000-50,000 jobs are offshored annually. Certainly this is an improvement from the 2000s, when the U.S. offshored as many as 150,000 jobs annually. U.S. manufacturing has been growing since 2010, adding 520,000 jobs and expanding 2.4% in real value added growth. But almost all of this growth represents cyclical recovery from the lows of the Great Recession.

Industries that suffered large declines in demand during the recession have increased production as demand has recovered. This is most evident in durable goods, which typically have the largest cyclical swings. In fact, durable goods have accounted for 72% of manufacturing job growth since 2010. By comparison, all non-durable goods together comprised just 3% of the job growth and had negative real value added growth of 6.8% from 2010 to 2013. So why is the reality so much more disappointing than the hype?

Experts cite increased global shipping costs with making producing in America more cost effective. In fact, global shipping costs, while elevated significantly in the late 2000s, have fallen dramatically and are back to normal. Likewise those who claim that a weak dollar will spur reshoring ignore that the value of the dollar is no lower than it was in mid-2000s when the U.S. lost a significant share of manufacturing to foreign competition, and has increased 13% in the last year.

Others write that labor cost differentials are narrowing with China. While this is true, the Chinese manufacturing laborer earns just 12% of U.S. wages and it appears that Chinese productivity is growing significantly faster than U.S. productivity. Finally, many tout the miracle of shale gas. While lower energy costs certainly help, energy costs are less than 5% of total costs in 90% of U.S. manufacturing industries. In other words, for most manufacturing industries energy savings are modest.

Classroom discussion questions:

1. Why is reshoring so difficult?

2. Is there a resurgence in American manufacturing?

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