Is America Recapturing Manufacturing? - Vested UK

Forever it seems, economists, commentators, and politicians have held out manufacturing as a source of national salvation.  In most descriptions, a vibrant manufacturing sector will create the secure, good-paying jobs essential to a decent middle-class life and in some perspectives, a means to secure democracy.  Those with a focus on national security see a strong manufacturing sector as essential to meet foreign challenges, these days from China but previously from Japan and before it the Soviet Union.  All, whatever their bias and particular focus, point to the 1950s, 1960s, and the early 1970s as a kind of golden age of American manufacturing and all the good it can bring the economy and the body politic.  Never mind that seldom have any who praise factory jobs ever held one and that three presidents during that golden age – Kennedy, Johnson, and Nixon – fret openly about the jobs lost to automation.  The lure of manufacturing nonetheless remains strong. 

Now it seems that after decades of decline, American manufacturing is making something of a comeback.  Investment spending in new facilities has surged and seems to have broad fundamental support.  The move would seem to have staying power.  Still, it would be a mistake to read into this any return of the golden age for which so many pine.  Even if the output surges, the jobs simply will not be there.

Recent figures are impressive.  Over the past 18 months, billions of new investment dollars have flowed into manufacturing projects.  Last year the figure, according to the Commerce Department, totaled some $108 billion, up 12.1 percent from 2021, itself not a bad year.  So far in 2023, the trend has accelerated greatly.  New manufacturing investment construction flows through March, the most recent period for which data exist, were 57.5 percent above flows during the same period of 2022.  All this spending has increased overall American manufacturing capability.  The capacity measure has grown only 1.4 percent over the last twelve months.  That is impressive considering that it takes considerable weight of new projects to overcome depreciation and add to a capacity accumulated over years.   Most significant, this recent expansion reverses a downtrend that had prevailed since the early years of this century.  Clearly, business is betting on domestic operations.

Supply chain considerations underlie much of this investment surge.  During the Covid pandemic and much of the recovery from its quarantines and lockdowns, many U.S.- and European-based firms realized that Chinese and other Asian sourcing was less reliable than was previously thought.  The same picture emerged when it came to energy, especially in China.  In response, many firms began to diversify their sourcing, some to facilities elsewhere in the world and some to bring the manufacturing home.  The homeward movement received an added impetus from rising interest rates.  The increasing cost of financing has impelled retailers and wholesalers to keep their inventories lean.  The attendant pressure on producers to make more prompt and frequent deliveries places a premium on nearby production facilitates.

Recent actions in Washington have added still more force to such considerations.  The recently passed CHIPS for America Act and the strangely named Inflation Reduction Act extend tax breaks for the sale of electric vehicles (EVs), alternative energy sources, and batteries.  That alone has encouraged production domestically.  The first of these acts also offers generous subsidies for companies building facilities to produce computer chips.  Some firms, such as Intel, already had plans for a new domestic operation.  It seems to have accelerated its plans to gather as much of the subsidy as possible.  Others have altered their overseas plans to take advantage of Washington’s largess.

At the same time as the domestic alternative has gained appeal, Asia has lost a long-standing allure.  From the time that China first opened in the late 1970s until recently, it pulled American business by offering an inexpensive and disciplined workforce.  As late as 2000, right after China joined the World Trade Organization (WTO), the average American wage was 33 times its Chinese equivalent.  Similar comparisons prevailed with Europe and Japanese wages.  That was a compelling attraction to a lot of American, European, and Japanese business.  Investment monies poured into China.  But in the intervening twenty-some years, China developed rapidly, and its average wage has risen accordingly, a lot faster than wages have risen in Japan and the west.  At last measure, the average American wage was still considerably higher than the Chinese equivalent, but at 6.5 times the cost gap is not nearly as compelling as it was.  

At the most fundamental level, automation and artificial intelligence (AI) are feeding this move toward domestic U.S. facilities.  These trends, by allowing producers to turn out more with less labor, make the wage gap – however narrowed – less of a consideration.  And business is taking advantage.  According to the Bureau of Economic Analysis, spending on upgrading systems and technology is running at five times actual construction of facilities.  Because it takes time and experimentation to implement these innovations, their impact occurs unevenly and sometimes over long stretches of time, but the evidence of an effect already exists.  So, for instance, domestic U.S. manufacturing output from the depths of the pandemic to the early months of this year increased about 20 percent.  But because automated facilities required fewer workers, domestic facilities managed this output increase with only slightly over a 15 percent jump in hours worked.  As more innovations come online, this difference will widen.

Comments by Black and Decker CEO Donald Allan, Jr. succinctly capture the impact across geography and over time.  In the firm’s new North Carolina plant, he has announced, the production line requires only ten to twelve workers.  That contrasts with older operations in Mexico and China.  These require 50 to 75 workers.  When the North Carolina plant is fully upgraded, the line will require only two to three workers.  Of course, Black and Decker could put the new technology in China or Mexico, but with all the other considerations already mentioned, the impetus is to make the investment at home.

As much as this new trend would seem to gratify those who have longed for a return of manufacturing, it will not bring back the golden age to which so many of these proponents allude.  The automation that is facilitating so much of the homeward move means that even a manufacturing boom would not employ the millions it did in that period 50-some years ago.  Those who are employed – the two-to-three workers at the new Black and Decker plant for instance – will no doubt command good pay and a secure place in the middle class, but they will otherwise have little in common with the factory workers of the 1950s, 1960s, and 1970s.  For this reason alone, even a domestic manufacturing boom will not lift the proportion of Americans employed in manufacturing much above the 10 percent averaged today and for some time now.  

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