U.S. Manufacturing is Actually on the Rise

We sat down with Jeff Korzenik, Chief Investment Strategist, Fifth Third Private Bank to talk about global manufacturing trends, and how the conventional wisdom needs to be reexamined.

Manufacturing in the U.S. is dead and gone and never coming back, right?

The U.S. economy has added more than 1.3 million manufacturing jobs since 2010. And its global share of manufacturing has risen from 16.5% in 2011 to more than 18% by 2016. In 2018, we added the most manufacturing jobs—284,000—since 1997.

Yes, there have been downward trends in manufacturing since 2000, but the important macroeconomic trend is that U.S. manufacturing in on its way back up—and that should continue in the foreseeable future.

Why the downward trend in the past? Was it only because of the financial crisis of 2008?

There was some impact from the 2008 financial crisis. But overall, the U.S. lost manufacturing jobs because of trade and cheap labor abroad.

The growth of manufacturing in Asia over the past several decades—China being the biggest player, but much of Southeast Asia contributing as well—sent those domestic jobs overseas.

That isn't a criticism or support of specific policy. When you have developing and developed countries opening their borders and playing a bigger role in global economic development, job loss was difficult and perhaps impossible to avoid. China was just so populous that we’ve never had this level of disruption from a new entrant to the global manufacturing base.

What's different now? Why isn't Asia remaining the go-to resource for manufacturing?

As China and Southeast Asia have developed, their economies and their workforce are achieving higher and higher standards—wages have increased at double digit rates, even as those in the U.S. moved little. At this point, U.S. manufacturing is cost competitive with China and their labor costs are even still expected to grow faster than in the U.S. While not true in every industry, product and geography, the decision to manufacture products at home instead of abroad is becoming much more comparable.

We're not going back to 1940s America where the majority of jobs are manufacturing, but we're still positioned to be a long-term significant contender for global manufacturing jobs.

Where is the next China? Will there be a new, emerging economy to be the next hub of global, low-cost manufacturing?

China and Southeast Asia have already captured all of the global manufacturing market they can capture. Moving forward, there's simply no one the size of China—no country with the organization and workforce—that can compete to fill in that niche. There's no one country, or even a group of countries to form some sort of collective, on the cusp of development that can replicate the disruption that China created in the past. At some point, perhaps Africa will reach that stage of development, governance and infrastructure—but failing that, we don’t expect the “next China.”

Why will the current uptick in U.S. manufacturing continue? What are the other factors?

First, the U.S. is going to stay competitive because there won't be another global economy to fill that role of low-cost manufacturing like Asia did. Second, when it comes to all the large, developed countries, the U.S. continues to have the cheapest energy costs.

Historically, coal has provided cheap energy, and as we've transitioned more and more to natural gas, that benefit has continued. Compare that to many European countries. They've seen higher overall costs and haven't been able to stay as competitive.

Certainly the U.S. can't just sit back and wait for the manufacturing jobs to roll in. What needs to happen domestically?

We have some policymakers who have written off ability to grow manufacturing domestically—succumbing to the myth that it's been outsourced forever because of advances in technology. But these manufacturing jobs were lost because of trade, not technology.

That's why training is key. We're in a labor-resource-constrained environment. We need to focus on building infrastructure, physical resources and talent. Businesses and policymakers need to understand the opportunity: working arm-in-arm with educational institutions, public high schools, community colleges, and workforce development non-profits

Where Fifth Third operates, we have a distinct advantage. Across the Midwest and throughout the South, the culture of manufacturing is still front and center. Kids are raised knowing manufacturing jobs are a viable career. Our educational institutions support and specialize in vocational training. Manufacturing business owners and community leaders know each other and can easily collaborate. Even the local transportation networks are built to support a manufacturing economy.

What's keeping businesses and communities from fully taking advantage of the trend?

Part of it is the mindset of the workforce. We've assumed you can't get a job without a 4-year degree, but that's because we've falsely assumed manufacturing jobs are going away forever. But you can. There are manufacturing jobs that pay $50,000 to $100,000 and include benefits, so we need to reinforce that truth with local training and opportunity.

The other part is the mindset of employers. Some manufacturers we talk to are backlogged with orders. They have more work than they can immediately fulfill—but they can't find enough workers to fill all the orders. Unemployment is low and the labor force is tight, which means employers may need to pay higher salaries and offer more benefits. Some businesses are considering loosening their hiring requirements and being more willing to train internally. This is a tradeoff each company will have to weigh.

There are people willing to work, but don't meet the company's criteria?

When you look at the labor force participation rate, there's a cohort of workers not coming back to workforce: males age 25 to 34. In many cases, they've given up trying to get back into the workforce because there's a mismatch of skills and needs, or improper education, or checkered history. Maybe they have a history of drug addiction or a criminal past. It's not that they wouldn't want to work, but they've given up because no one will hire them.

So, we have companies who have orders that need to be filled, need workers who—at least in principle—would be able to help fill those orders, but a company's hiring standards disqualify those workers from getting jobs. Obviously, these companies have these policies in place for a reason. A lax drug policy could be a disaster for work safety in manufacturing.

It’s not an easy decision to make. Many businesses are waiting to see how the China–U.S. trade talks pan out over the next couple of months. Some are willing to wait and see how the labor market shifts over the next two or three years—or waiting for some other manufacturer to be the first to change their hiring practices and see how it plays out for them.

What's the main takeaway for communities and businesses looking to capitalize on domestic manufacturing?

Work to create an attractive manufacturing environment for current and potential employers. Establishing a city with a diverse workforce offering and with varied manufacturing expertise will help feed and support itself—and organically attract industry players. That starts by educating and empowering the local workforce through partnerships with educational institutions and similar programs.

Yes, domestic manufacturing took a dip early in the 2000s, but it's coming back—likely to stay. The smart move is to put programs in place now that will give the current and future workforce the skills and knowledge they need to take advantage of these jobs, driving economic growth and creating a more empowered consumer.