U.S. manufacturing underwent a very successful July, based on the Institute for Supply Management’s monthly factory index. The ISM index sprung to 55.4 in July – up from an average of 50.2 from April to June this year, and far exceeding industry expectations (any score over 50 denotes growth). Lower domestic energy prices, along with economic uncertainty in other key global manufacturing regions like China and Europe have played a pivotal role in influencing long term manufacturing growth for America.
As Your Energy Blog wrote about back in June, U.S. manufacturers have established multiple competitive advantages in the global market. John F. Floyd of the Gadsden Times cites lower manufacturing costs in comparison to many notable countries as a strong indication of a manufacturing resurgence. “High wages, very restrictive labor contracts and more expensive energy costs for Europeans have all accounted for [manufacturing cost] disparity,” Floyd notes. The end result are costs 7 percent lower in the U.S. compared to England, 18 percent lower costs than Germany, 17 percent lower than France, 19 percent lower than Italy, along with 13 percent lower than Japan, and 3 percent lower than Canada.
A similar report was released in April by Alixpartners, illustrating that the U.S. has caught up to Mexico in terms of manufacturing “attractiveness,” based on a survey with executives in the industry. In the same report, Alixpartners stated the U.S. will be on par with the manufacturing costs of their largest industrial competitor, China, by the end of 2015. While some industries will remain more viable overseas for many years, there’s a definite transition occurring in favor of the U.S.
Five Million Jobs Returning?
A report released in August by the Boston Consulting Group (BCG) reflects the analysis of both Alixpartners and the Gadsden Times. As the BCG report explains, one of the largest factors in determining manufacturing costs is the price of energy within a country or region. With the development of natural gas and oil drilling in the last several years, American energy prices have remained very low compared to other parts of the world. In Japan, the natural gas price is currently around three times the cost in the U.S., and the average price remains 60-70 percent lower in America than the rest of the world.
Based on market trends analyzed in the report, much of the drastic job losses from “outsourcing” production to China over the last fifteen years will reverse in the near future — resulting in a lot of manufacturing jobs being ‘reshored’ back to the States. Based on BCG’s estimation, the U.S. is on the verge of regaining 2.5 million to 5 million jobs back by 2020. An influx of those positions in the workforce would drastically decrease the national unemployment rate, approximately by 2 or 3 percentage points and it would also lessen the trade gap with China. Aside from China, the output from a larger American workforce would also generate an additional $70 billion to $115 billion in annual exports from products currently being made in Western Europe and Japan.
The BCG report also referenced several notable companies that have already made the shift back to the U.S. Honda is ramping up production at its Indiana and Ohio plants. Michelin of France will invest $750 million to create a new factory and expand its current one in South Carolina to manufacture large tires used for construction equipment. Toyota Motors announced they would begin to export Camry sedans assembled in the U.S. to South Korea, and hinted the same for Russia and China. In fact, the president of Toyota Motor North America was quoted in a press report from August saying, “This is just the beginning of a new era of North America being a source of supply to many other parts of the world.”
Although no prosperity is guaranteed for the years ahead, the market seems to indicate that we’re on the verge of a strong boom period when it comes to job creation for the manufacturing industry. While it’s not irrational to hear such news and be a little skeptical, especially after losing 5 million manufacturing jobs since 2000, more months like July 2013 will silence even the harshest critics.