Forecast for U.S. Manufacturing 2015-2016
Reshoring will continue, but not across the board. The greatest reshoring will occur in industries that benefit most from cheap natural gas and have access to global markets. These are chemicals and metals (both primary manufacturing and fabrication). The other major industrial user of natural gas is glass and ceramics, but these are not much traded internationally due to high shipping costs. As a result, cheap natural gas will not help our glass companies gain global market share. (For more background, see my article Energy Forecast 2013-2014: Convert To Natural Gas.)
Reshoring will also continue for products that change rapidly, including fashion apparel and technology, but whose product value/weight ratios do not justify air freight.
In addition, products that are made with relatively little labor will be more likely to reshore. Chemicals plants, for instance, have little labor relative to the value of production, so offshore production does not save much. Most of them, however, never left our shores.
Reshoring will be less pronounced in sectors with strong foreign demand for the products. Why shut down a Chinese plant if Chinese demand for the product is increasing? However, reshoring may occur in cases where total demand is rising. Instead of closing the foreign factory, a domestic U.S. factory will add to capacity.
Companies will also prefer geographic diversification over concentration. In 2011, Thailand floods closed many factories, as did Japan’s earthquake. Companies with multiple facilities were in much better shape than companies which had concentrated operations in one location.
The trend to reshoring will continue, but it will be limited to a few industries where it makes a lot of sense. Further offshoring will probably be limited—those companies that would benefit from offshoring have already made their moves. Domestic production of manufactured goods will continue based on our economic growth.
Looking forward, I assume that additional offshoring will be roughly offset by reshoring, and we’ll go back to manufacturing production moving closer to GDP growth. There will never be a one-to-one ratio of manufacturing growth to GDP growth so long as services continue to expand, aside from short-term cyclical recoveries. However, the growth of manufacturing will be much better than recent history. I won’t call it a boom, but it’s the next best thing.
Finally, don’t expect manufacturing employment to grow along with production. The fastest-growing parts of manufacturing will be those that use the least labor. Productivity in factories continues to improve, so the best jobs picture we can hope for is flat. The peak year for U.S. manufacturing employment was 1979, and we’re not going back there.
