Economic Forecasts

U.S. Manufacturing Growing Steadily

Cheaper domestic energy, rising wages overseas and industries that use high-tech to make high-tech products are making producing goods on American soil attractive again.

U.S. manufacturing continues to step it up, with another solid gain in output this year—3.5% or better. Nearly five years after the Great Recession ended, it continues to outpace the rate of overall GDP growth. New business and goods-out-the-door are up. There’s more optimism and more hiring. For seven months in a row, the number of factory jobs has increased. By year-end, 100,000 more workers will be added to payrolls. There’s growth in every region of the country, and it’s cutting across a swath of industries.

Aviation manufacturers are sitting on a backlog of orders. With car and light-truck sales (including imports) likely to top 16 million this year, assembly lines will hum. Chemicals—everything from paint thinner to plastic resins—are expanding on cheaper petroleum. Pharmaceutical companies continue to chug ahead. Biotech is likely to see double-digit growth again in 2014. Gains in the U.S. for medical equipment are steady, and prospects of increased export sales are bright. Next-generation computer chips have semiconductor makers going strong. Even heavy equipment is thriving, with rising global demand for building, energy exploration and drilling equipment, and more.

The broad expansion is partly just the pendulum swing after recession cutbacks. (From 2008 to 2009, factory output fell 20% and 2 million workers were laid off.) But it also reflects some big shifts in the global business environment. First, the relative cost of producing on U.S. soil compared with overseas is declining. Productivity improvements—automation, etc.—are shearing per-unit labor costs here while rising wages elsewhere in the world shove them up. Domestic energy supplies are abundant, thanks to the fracking boom. And lower shipping expenses help as well.

But a slew of less obvious cost benefits to operating in the U.S. are increasingly garnering recognition, too: Fewer worries about intellectual property and technology theft. More-timely delivery. Political stability. Legal and regulatory systems that are clearer and more easily navigated.

If you’re skeptical about how much value such intangibles have, consider these figures from a recent World Bank study on just one of the factors: the potential difference in settling a typical contract dispute over the sale of goods. In the U.S., that might take 370 days and cost 14% of the claim’s value to resolve. In East Asia, the same dispute would likely chew up 522 days and a whopping 49% of the claim’s value. In Latin America, the tally would be 727 days and 31% of the value. In South Asia, it would typically take three years to tie up. And the U.S. compares favorably even with other highly developed nations. There, resolution of such a dispute would typically require 510 days and cost the company 20% of the claim’s value in legal and other fees.

Another factor favoring the growth of U.S. manufacturing in the years ahead is the growing use of advanced technology and processing, an area in which the U.S. has a significant competitive advantage. Much basic manufacturing—making products such as glass, steel, textiles, apparel and furniture that require little processing—has fled the U.S. for lower-wage sites overseas.

With the exception of computers and electronics—the one advanced tech category that benefits from lower labor costs—industries requiring more sophisticated processing are more likely to stay put. They include aviation, automaking, biotechnology and industrial machinery. Indeed, 37% of U.S. manufactures and 45% of exported goods are advanced tech: Medicines and medical devices, power generation and transmission equipment, communications gear, navigational instruments, magnetic and optical media, etc. All told, such products account for nearly 5% of GDP. Add on related services, such as software design, and the total rises to about 13%. Over the next decade, those shares will climb even higher, even faster.

As a result, the long slide in manufacturing’s share of GDP may be ending. After dipping sharply during the Great Recession, it will approach 13% this year—roughly the same share as in 2004 to 2007. Look for factories’ share of employment, however, to continue to slide as automation, including robots, takes on a larger role.

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