Manufacturing Bouncing Back

America's manufacturing sector is recovering and poised for a modest rebound. The question is how much?

The long decline in America's manufacturing sector finally is over. During the past two years, manufacturing output has regained almost three-quarters of the stunning 20% drop it took during the Great Recession. And manufacturing firms have pared their production costs and improved their efficiency. Now they are poised for a comeback.

The Manufacturers Alliance for Productivity and Innovation, the industry's trade group, predicts that manufacturing output will rise 2% this year, 3.3% in 2014 and 4.2% in 2015 -- a modest rebound, but headed in the right direction. Some industry experts see decidedly better days after that, and talk of a renaissance in U.S. manufacturing fills the air.

The sweeping structural changes that manufacturing companies have undergone are putting U.S. factories back in the game. Over the past few years, U.S. productivity has improved, wages have remained flat, and automation has replaced many human workers. Labor unions have lost much of their clout. Other costs have fallen sharply: Interest rates are low. Oil and gas supplies have mushroomed, while energy prices, particularly for natural gas, have plunged. And the dollar's value has declined, making U.S. exports less expensive and foreign imports more costly to buy.

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At the same time, rising wages in China, combined with the spread of robotics here at home, are eroding the attractiveness of outsourcing production to low-wage countries. The nuclear disaster in Fukushima, Japan, gave companies pause about global supply chains. The upshot: A growing number of U.S. firms have begun to bring production home.

"The U.S. has gotten more competitive," says Harold L. Sirkin, a Boston Consulting Group senior partner who watches manufacturing. He predicts the U.S. will create up to 1 million manufacturing jobs over the next 10 years. "The U.S. will become a manufacturing center, and not just for American companies," he says.

Sirkin foresees visible gains in overall manufacturing output in industries such as computers and electronics, appliances and furniture, chemicals, fabricated metals, plastics and rubber, and automobiles and automotive parts. "We're really seeing signs of a turnaround," he says.

Even so, most analysts expect that manufacturing won't take off for another couple of years, at least. The U.S. economic recovery continues to be anemic, without enough oomph to propel factories at full speed. And the global economy is lagging further, so manufacturers can't count on exports to spur production at home.

"The missing ingredient is demand. Everything else is falling into place for manufacturing," says Mike Montgomery, an economist at IHS Global Insight in Lexington, Massachusetts. "The structural issues that manufacturing faced before have almost entirely sorted themselves out. But demand isn't growing fast enough."

And the golden days of the 1960s and early 1970s aren't likely to come back anytime soon. The resurgence will be modest. Large multinationals will continued to retain large plants abroad. At best, the gains will replace much of the employment losses incurred during the recession.

"You can say that the worst is over for American manufacturing," says Barry P. Bosworth, a Brookings Institution economist who keeps tabs on manufacturing. "The loss in factories will be slower than it's been over the past three decades because we no longer have to shed low-skill jobs and increase our efficiency in order to compete."

Even so, while U.S. manufacturing has come a long way in adjusting to the post-1970s world, it still faces some daunting challenges. Already, factories are having difficulty finding skilled workers for today's manufacturing jobs, and the problem will intensify as the work force ages. So far, the U.S. has done little to address it.

And while innovation in this country is going strong in a few high-profile scientific fields, such as nanotechnology and computer science, translating that into manufacturing is going more slowly than economists say is needed. Labor Department figures show, for example, that the number of new start-up firms has been declining steadily since 1998.

Art Pine
Contributing Editor, The Kiplinger Letter