The other day I read an article bemoaning the state of the US economy. I read pieces like this every day, but one comment stuck in my mind. The author pointed out that the American consumer might be in a permanent pall, and without all that buying power reinforcing demand for the junk we accumulate, what else would power US GDP in the coming decades? We could debate whether the premise – the death of the American consumer – is correct, but let’s not. It’s more interesting to ruminate on the answer to the author’s question regarding our future. If we don’t consume, then what?
We think the answer is manufacturing. Contrary to popular opinion, the US manufacturing sector is alive and well. We produced around $2 trillion of goods last year, much of it high value, technology intensive goods. China produced a similar amount, and just edged the US out of top place according to some figures, but their production is focused on cheap, easy to make items such as apparel or commodity items such as steel.
No other country comes close to the manufacturing output of China or the US. So the claim that we don’t make anything any more is false.
While the US pumps out goods right and left, employment in the sector has only recently begun to edge up, after decades of decline. That’s because US plants are incredibly efficient, thanks to advances in plant design and management; US plants just don’t need much labor. But we still think employment trends will accelerate in the sector, and that more manufacturers will build plants in the good old US. Here’s why:
- Transportation costs are rising, and will continue to do so. It’s expensive to move stuff, especially large items, across the ocean.
- Potential supply disruptions from natural disasters, such as the tsunami in Japan and the floods in Thailand, have proved that depending on one location for all your hard drives or auto parts isn’t such great planning.
- Labor costs in China particularly, and Asia generally, are rising. Many Asian nations have instituted minimum wage laws and/or increased minimum wages recently. Additionally, China is becoming more aware of the social costs of being the world’s cheapest manufacturing site – in terms of worker safety, pollution, and other social disruptions. As a result, the country is gradually becoming less friendly towards foreign corporations.
- The gradual rise in the renminbi, China’s currency. Historically, China’s currency has been kept artificially low, making its goods cheap. Likewise, the Chinese can’t buy US goods – the high dollar/renminbi makes such transactions very expensive. But as China’s currency rises, its populace can consume our goods at a cheaper price.
- A growing awareness among states – especially in the rustbelt – that they must be competitive not just with other states but the rest of the world in order to attract jobs. Like it or not, we live in a global economy, and we must begin to think that way.
Shifting the tide in US manufacturing won’t happen overnight, but change is afoot.