US Battle to Revive Manufacturing – Part I

WASHINGTON: In his January 2012 State of the Union address, US President Barack Obama mentioned the word “manufacturing” eight times. By comparison, his predecessor, George W. Bush, mentioned manufacturing once in eight of his State of the Union addresses.

In what was effectively the kickoff of his 2012 presidential reelection campaign, Obama told likely voters worried about the fate of the economy that: “we have a huge opportunity, at this moment, to bring manufacturing back” and that “a blueprint for an economy that lasts begins with American manufacturing.”

His words were music to the ears of a US public eager to return to a not-so distant past when manufacturing jobs provided an income that enabled the average American industrial worker to live a middle-class lifestyle, the ability to save to buy a home and pay for a child’s college education, and money and time to play golf or go fishing.

The loss of that manufacturing-supported standard of living weighs on Americans. A 2011 survey for the Alliance for American Manufacturing found that 79 percent of likely 2012 voters said that the United States had lost too many manufacturing jobs. By two to one, 63 percent to 32 percent, they thought creating manufacturing jobs was more important than reducing the federal budget deficit. And 86 percent favored a national manufacturing strategy to make sure that American economic, tax, labor and trade policies work together to help support manufacturing.

So the president’s newfound interest in manufacturing – he had mentioned the word only once during his three previous State of the Union addresses – was in touch with voter sentiments. And it seems in touch with reality. Daily headlines talk of US companies bringing jobs back home from China and new hires by those still producing in the United States. KEEN, a footwear design and manufacturing company, has moved production back to Oregon from China. And Master Lock has brought back jobs from China to its facility in Milwaukee, Wisconsin. The country appears on the cusp of a manufacturing renaissance.

But the underlying reality of manufacturing’s comeback, the role it can play in America’s economic recovery and whether all this can help reelect the president in the fall is less certain. Manufacturing faces severe challenges, as outlined by a recent McKinsey report: technological change that creates new jobs but destroys existing ones, a widening gap between the skills that employers seek and the skills that employees possess, and a geographic mismatch between where the jobs are and where the workforce exists.

The US economy grew 3 percent, after adjustment for inflation, in the fourth quarter of 2011 compared with the preceding quarter, the latest available data from the US Bureau of Economic Analysis. It signaled an acceleration of the US recovery from the Great Recession triggered by the 2008 financial crisis.

Industry has been a major driver of that growth. Its contribution to growth in 2010 was nearly twice that of the services sector. Manufacturing currently accounts for 11 percent of America’s GDP – it was 25 percent in 1947 and has been declining slowly since then, with a precipitate fall off beginning in the late 1990s. And there’s reason to believe, and it’s certainly the Obama administration’s hope, that proportion may rise a bit in the years ahead.

The United States is the world’s mightiest manufacturing economy, producing 21 percent of all goods made globally. China is second at 15 percent.

Manufacturers are a major source of innovation, accounting for more than two-thirds of all research and development conducted in the United States. And manufacturing workers have higher pay and more generous benefits – about a fifth higher – than Americans holding non-manufacturing jobs.

Manufacturing remains critical to America’s success in the world marketplace. Exports of goods account for three-fifths of all US sales abroad. President Obama has promised to double US exports by 2014. And the only way to reach that ambitious target is to increase manufactured exports. That requires a stronger industrial sector.

Manufacturing employment is also on the rise. In February there were 11.9 million Americans employed in manufacturing, up from a low of 11.5 million in January of 2010. But in January 2002 there were 15.6 million American industrial workers, so the recovery has some way to go.

Some analysts contend that revival is just around the corner. A 2011 report by the Boston Consulting Group concluded that by 2015 manufacturing in some parts of the United States will be as economical as producing in China, ushering in a new era for American manufacturing. Anecdotal evidence of such insourcing already exists.

But key details of the Boston Consulting Group’s widely reported study – it made the front page of The New York Times – bear noting. It assumed future industrial wage rates – and thus a standard of living for US manufacturing workers – equal to those presently in the American south, the country’s poorest region. The study also assumed worker flexibility comparable to that found in new US autoworker contracts. That flexibility dictates that newly-hired workers be paid about half what existing autoworkers are paid. It also means that new autoworkers earn 17 percent less than similar new hires earned in 1961, after adjustment for inflation.

All this suggests that the manufacturing revival going on in the United States, perhaps into the future, should not be equated with a revival in the American standard of living. There may be more manufacturing, but workers take home smaller pay packages than a decade earlier. Even then, the manufacturing rebound is happening in a small number of states.

So far, average weekly manufacturing wages are up in every 2012 presidential battleground state. That should be good news for Obama. However, manufacturing wages are growing slower than average weekly wages in seven of the 10 key states come November. So, manufacturing workers are losing ground in terms of their standard of living relative to that of their neighbors.

In the 10 likely swing states in the 2012 presidential election, such as Ohio, Pennsylvania and Florida where the outcome is likely to determine who prevails in the American Electoral College that actually selects the president, the number of manufacturing jobs is up in all of them, measured from the third quarter of 2010 to the third quarter of 2011. But in only four of these states is manufacturing employment growing faster than overall employment, indicating that manufacturing is lagging not leading recovery in the majority of those states.

This harsh reality may explain why the recent increase in US manufacturing jobs and Obama’s newfound interest in promoting such resurgence may not benefit him in the fall US election. This reality may also help explain why the most recent public opinion polls show that, in head-to-head competition, Obama is ahead of Mitt Romney by more than the margin of error in only three of the 10 swing states.

So the US economy is recovering, and manufacturing is leading the way. But more jobs and growth will not necessarily translate into a rebound in the American standard of living. Thus despite the resurgence of manufacturing and the revival of US exports that Obama made the centerpiece of his economic strategy, he may still face a tight race for reelection.