A few months ago I asked, “Can the United States Make Manufacturing Grow?” I noticed that President Obama had put together several initiatives to help the manufacturing industry in the US grow and wondered whether or not they would work. Well, it seems manufacturing is growing, particularly in the southern United States. But now we have two questions we need to answer: “Why did this happen?” and “What does this mean for U.S. manufacturers?”
What Do You Mean by “Growth?”
First off, you probably want to know why I am saying manufacturing is growing. Statistics tend to be a lot like puppets. You can make them say whatever you want. A lot of people like to look at a stat called the PMI (Purchasing Managers Index). Recently, this number went from 57.1 to 59. Every news outlet had some headline like “U.S. manufacturing growth fastest pace in 3½ years.” The only problem is that this is broad survey that does not take into account actual numbers.
PMI is calculated by a survey that is sent to executives at manufacturing companies. They are asked whether their purchase orders, employment, deliveries, etc. increased or decreased. They don’t ask how much the increased or decreased, only if they did. That means if several big markets went completely under, while lots of small markets barely increased, the PMI could indicate that manufacturing is growing on a whole, while in reality it is shrinking like George Costanza in the cold. This means that PMI is giving manufacturers and investors a “gist” of how the market is doing. While it is good that the “gist” of the market is good right now, I like to see real numbers.
The U.S. Bureau of Labor says that there were over 14,000,000 manufacturing jobs in 2006 and by the beginning of 2009 that number went down by over 3,000,000. Since 2010, that number has been growing steadily and we now have about 12,300,000 people working in the U.S. manufacturing industry. Manufacturing output tanked in 2008 during the recession but has now grown well past where it was in the early 2000s. Perhaps most interesting is the fact that the number of manufacturing companies in the U.S. has been decreasing since the 1990s, but in 2014, the number of manufacturing companies increased for the first time in over a decade.
So it appears that the “gist” surrounding manufacturing is improving as well as the actual numbers. That leads us to the all-important “why.”
Causes of Growth
There are several different factors that all could be partially responsible for the growth of manufacturing in the U.S. However, none of them seem to be “the one” reason. Nathaniel Thomas McGill, who directed a documentary about the nature of the manufacturing world, discovered that the “buy local” and “organic” food movements are influencing the business world. The VP of purchasing from another manufacturing firm that Mixer Direct has a relationship with suggested that he is trying to keep his company from moving any other sourced material overseas for quality reasons. President Obama’s manufacturing hubs, government funding for job training, and southern state’s tax incentives encouraged foreign companies to invest in manufacturing plants in the southern U.S. according to a recent Bloomberg report. These anecdotal reasons are just the tip of the iceberg though.
The rise of cost of making goods outside the U.S. has gone up quite a bit. Since 2001, and the cost of labor per hour in China has increased 500% (from $0.82 to $4.93). During the same time, the price of labor per hour in the US has increased 44% (from 14.29 to 20.69). While U.S. labor is still more expensive, the comparative savings is not nearly the same as it was in 2001. In 2001 it would have been 17.4 times more in labor to make an item in the U.S. while now it is only 4.2 times more expensive. When taking into account labor, energy costs, productivity, and currency exchanges, it costs $0.96 to manufacture an item that would cost $1 to make in the U.S. But that’s before you add transportation cost and import taxes. Factor those costs in and it actually becomes more expensive to manufacture an item in China than in the U.S. With that being the case, it starts to make a lot more sense why companies are starting to move production plants to the U.S.
What Does It Mean for Manufacturers
U.S. manufacturing is growing. Business executives in the manufacturing world feel like their sectors are increasing and are investing. The “Made in America” movement is growing. The comparative cost of manufacturing in the U.S. is getting cheaper. The local, state, and federal government agencies are pushing for more manufacturing jobs and giving incentives to bring those jobs in. Unless you see something I don’t, now would be a good time to start investing in U.S. manufacturing.