It’s hard to believe that U.S. manufacturing is considered by many analysts to be on the brink only months after domestic automotive sales soared to never-before-seen levels.
Yet the industry’s economic activity has been contracting for at least four months, according to the Institute for Supply Management. Outside of car production, America’s goods-producers are languishing, with few other industries catching a whole lot of traction.
Domestic manufacturing employment peaked in 1979, when nearly 20 million Americans worked in the sector. By early 2010, payrolls dropped to just 11.5 million and have rebounded only slightly since.
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The decline has been referenced by both Republican and Democratic presidential candidates throughout the 2016 election cycle. The shift is a significant problem for the U.S. economy, candidates agree, but righting the ship is hardly an easy task given America’s strong dollar and weak international trade environment.
Scott Paul, president of the Washington-based nonprofit Alliance for American Manufacturing, says “there could be a better future” for the country’s embattled goods producers.
U.S. News recently spoke with Paul to hear his take on what’s happening to the industry and what can be done about it. Excerpts:
From a 30,000 foot view, what’s going on in manufacturing right now?
We’ve had better years, and part of the challenge that manufacturers face right now is that the rest of the world isn’t doing so well. That has multiple impacts. It impacts our exports.
A second impact is that China in particular has been weak. And China’s industrial scale is about the only thing out there that matches or surpasses that of the United States. Most of the economy in China is heavily state-driven and state-owned, so when their economy slows down, their factories don’t slow down fast enough, and that results in a lot of overproduction, or what economists would call overcapacity, that will have an impact on prices that will ripple back to the United States. Particularly in some industrial sectors in the United States like steel, aluminum, iron ore, glass – you’ve seen the fortunes of those manufacturers decline, and there’s still no relief in sight from that.
On the flip side, one of the brighter spots that I do see is the auto sector. Auto sales have been pretty strong, and I think the strength of that sector is in some ways masking the weakness that export-driven and commodity-based manufacturing is facing right now, not to mention the segment of manufacturing that is linked with the oil and gas portion of the economy. That’s fairly significant.
Prices are so low that the price at which expanding supply makes sense has not been met. There hasn’t been a lot of new investment. There’s been a lot of retrenchment in oil and gas, and that impacts companies that supply that industry, and that’s not an insignificant part of manufacturing.
Most manufacturing economic indicators have been underwhelming of late, with the Institute for Supply Management projecting the sector has been in contraction for four months. But durable goods orders released Thursday were pretty strong. One month doesn’t make a trend, but what do you expect to see through the rest of the year?
I’m cautious about calling a trend right now. There have been spotty suggestions that there may be an uptick in some of these indicators. I’m reserving judgment until we see more data.
We’re racking up pretty enormous manufacturing trade deficits, which means we’re not exporting enough and we’re not supplying enough for our own market right here. And a lot of that has been replaced by imports. We have an ongoing challenge there that has an impact not only on manufacturing but on GDP as well, since net exports are a component of GDP. The trade deficit has been dragging down GDP pretty regularly, at some points between 1 or 2 percentage points.
Ford is among a host of companies to have recently announced an operational move to a location outside of the U.S. – in Ford’s case Mexico. GOP front-runner Donald Trump has repeatedly discussed taking jobs back from China and Mexico, among other countries. To what extent has manufacturing been impacted by offshoring labor?
There was a period of time after the end of the Great Recession where manufacturing was getting back up on its feet. When you looked at the entire cost equation, including energy costs in the United States, there were some companies that were looking to bring back work to the United States from abroad. It’s called reshoring. It’s bringing work back from near-shore locations like Mexico, but also from China and the Philippines and India and other countries.
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There had been some anecdotal evidence that reshoring some of these jobs was occurring, actually. But over the last 18 months, it’s been more of a challenge. And part of that is probably driven by the value of the dollar [and] the fact that energy costs are not particularly high anywhere right now. The global price for crude is pretty low. And other sorts of trends, like the fact that wages aren’t going up in China as fast as some may have predicted, have contributed to reinvigorating the tendency that some companies have to offshore work.
Mexico, because of the wage differential and the proximity, is a location that a lot of companies who are pursuing this race to the bottom are pursuing. There’s still work that’s going overseas to some of the Asian manufacturing countries as well. When you look at the data overall, I think it’s very fair to say there’s still activity. Most companies don’t have any plans to either reshore or offshore work, first of all. But of the companies that have plans to do either, there’s still more offshoring than reshoring occurring. [To change that trend] will require shifts in energy costs, in exchange rates and other factors like that.
Is there any kind of government regulation or new legislation that would fix this problem?
If there was a single silver bullet piece of legislation that you could pass, I hope that would’ve been done a long time ago. But it’s obviously a suite of challenges, just like any industry that’s in global competition faces. But I think the most useful thing policymakers could do involves shoring up on the domestic side our competitiveness, which means investing in skills and training [and in] our infrastructure; continuing investments in research and development between the public and private sectors to ensure we maintain a technological lead that we’re incorporating on our factory floors.
And it also means ensuring that we have a competitive tax code. It doesn’t mean cutting the rate way down across the board … but we need to focus on particular tax provisions that promote incentives to invest and recover the cost of capital in the United States – accelerated depreciation and other types of tax mechanisms that can be useful for encouraging investment in the United States. This is why presidential [candidates] don’t talk about this all the time. You can’t say this in 10 seconds.
On the trade side, I think it does involve some rebalancing of trade. We have to be pretty aggressive about policing subsidized or dumped imports into our economy, and we should take a look at demanding some reciprocity, particularly from countries with which we have some pretty lopsided trade balances. China and Japan are principal among those, by volume. I think there’s a need there. And also on the monetary policy front, [we need] to ensure that the dollar is fairly and competitively valued rather than being overvalued, which has a dampening impact on our ability to export.
What kinds of opportunities are available at domestic manufacturing outfits?
I think that one of the challenges that small and mid-sized manufacturers face when looking for employees is unrealistic expectations and old ideas about how to recruit. In manufacturing, quite honestly, there wasn’t a whole lot of hiring that was going on between 1998 and the end of the Great Recession. It was a big down time, and we actually shed about a third of all of our manufacturing jobs over that period.
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The job market has changed. The generation has changed. The skill requirements to work in factories have changed. Most factories now require some post-secondary credential, and before the recession, that wasn’t the case.
And the other factor that’s creating some of these opportunities is that the manufacturing workforce in general is aging. Folks in manufacturing are probably going to retire a little before the folks in the rest of the economy, because even though you’re not necessarily using your muscles all day long, it can be a pretty tiring affair in some of the occupations.
Productivity and automation may contribute in some part to dampen hiring. [But] there will be some opportunities in manufacturing. We need to work together to develop effective training programs to prepare for that. At the same time, I don’t think it does anybody any favors to suggest there’s an enormous volume of unfilled positions in manufacturing. The data just does not support that.
There could be a better future for manufacturing. I don’t think that it’s inevitable that we have to lose a significant number of manufacturing jobs in the years ahead. But that’s incumbent upon broader growth in the economy, a more competitive and reasonable exchange rate and making some of those domestic investments so that we can ensure that we’re globally competitive. A lot of these are policy choices and not necessarily market forces. I recognize that there are business cycles, but there needs to be good policy as well.
