Is America’s Manufacturing Recovery Overhyped?

American manufacturing recovery

January’s State of the Union address gave scant mention of manufacturing, a surprise to many, especially since the White House claims it’s added 786,000 manufacturing jobs since February 2010 and continues to gain momentum with its National Network for Manufacturing Innovation. But a new study by Washington D.C.-based think tank ITIF paints the stark reality.

The ITIF (The Information Technology and Innovation Foundation) reports that the manufacturing recovery has been hyped significantly.

In fact, the ITIF argues, at the end of 2013 there were two million fewer manufacturing jobs and 15,000 fewer manufacturing establishments than half a decade earlier, and real manufacturing value added was 3.2 percent below 2007 levels despite GDP growth of 5.6 percent.

Much of the manufacturing resurgence, the report claims, can be accounted for by upturn in demand, especially for motor vehicles and other durable goods, as the recession eases. In fact, 72 percent of jobs gained and 187 percent of manufacturing growth between 2010 and 2013 came from the transportation sector or primary and fabricated metals, the ITIF reveals.

And while reshoring—mentioned in the State of the Union—has made a modest impact, the ITIF says America’s manufacturers continue to send jobs overseas at the same rate.

The ITIF study takes to task five common beliefs about the manufacturing renaissance:

1. China no longer has cheap labor 

Chinese wages have grown 16.7 percent annually from 2002 to 2009, but Chinese workers still earn only 12 percent of the average American wage. Further, wage growth is contained to the coastal regions of China, with the interior populations still earning relatively low wages. Rather than reshore to the United States, manufacturers are relocating to China’s interior or are looking to Vietnam, India, and Cambodia.

2. Global shipping costs give the U.S. an advantage

Undersupply led to skyrocketing global shipping costs in 2008. However, today shipping costs are back to normal after falling by 93 percent in a six month period in 2009.

3. Shale gas has reduced energy costs, boosting manufacturing

The shale gas boom lowered energy costs in the U.S. by 11 percent from 1998 to 2010, but the predicted uptick in manufacturing is yet to materialize. Benefits have been contained to oil and gas refining and energy intensive industries. For 90 percent of the manufacturing sector, energy costs are lower than 5 percent of shipment value.

4. Currency fluctuations will fix the trade deficit

In the long-term, macroeconomic theory states that currency valuation should fix trade deficits. However, the U.S. has been running a trade deficit since 1975, and the trade imbalance is wider than ever. The dollar is currently at a comparable level to where it was during the 2000s, when job losses accelerated, and has proven unable to fix the persistent trade deficit of the U.S.

5. Superior U.S. productivity growth will restore jobs

U.S. productivity is not increasing faster than that of other industrialized countries, and is growing much slower than China, South Korea, and Germany.

The best promise for American manufacturing, the ITIF report concludes, involves a strong national manufacturing strategy that focuses on production methods such as robotics, digital factories, and 3D printing. These new technologies will transform manufacturing and dramatically increase productivity.

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