The idea of a U.S. manufacturing resurgence has been a hot topic in political circles lately, with promises of revitalizing the industrial strength that the American economy once boasted. Both the Trump and Biden administrations have rolled out ambitious plans to reshore manufacturing, including tariffs, tax incentives, and significant government investments. However, analysts at Alpine Macro have pointed out that the manufacturing sector in the U.S. has been on a gradual decline for decades. Back in the early 1970s, manufacturing value added accounted for 23% of GDP, whereas today it hovers around 10%. Although there have been improvements in certain key sectors, median output across sub-industries has actually dropped by 20%. This indicates that any increases in production are concentrated in only a handful of industries, leaving a large portion of the manufacturing sector stagnant.
When it comes to employment, the steady decline in manufacturing payrolls has persisted, despite a gain of 1.5 million manufacturing jobs since 2010. However, this recovery is overshadowed by the 6 million manufacturing jobs lost in the 2000s. Currently, manufacturing jobs make up only 8% of the workforce, reflecting the sector’s ongoing decline and casting doubt on the claims of a full-scale industrial revival.
While there has indeed been an increase in manufacturing investment, it has primarily been limited to specific industries like semiconductors. Overall capital investment in manufacturing has remained stagnant, with fixed asset formation showing no real growth over the years. The decline in capital expenditures on equipment, from 8% of GDP in the 1980s to just 5% today, is indicative of the sector’s struggle. This lack of investment is closely tied to diminishing productivity levels in manufacturing, further complicating any hopes of a renaissance. Productivity growth within manufacturing continues to lag behind other segments of the U.S. economy, painting a bleak picture for a comprehensive recovery.
The challenges facing U.S. manufacturing extend beyond issues of investment and productivity. As economies evolve, the shift from industrial-based growth to service-driven economies becomes inevitable. Wealthier nations tend to shift their consumption habits towards services, leading to a decreased significance of manufacturing. Even countries like China, known for their manufacturing prowess, have seen a decline in the manufacturing sector’s share of GDP since 2008. This broader economic transition makes attempts to re-industrialize the U.S. arduous and largely counterproductive.
One of the biggest roadblocks to a U.S. manufacturing resurgence is the high labor costs in the country. American workers may be about 70% more productive than their Chinese counterparts, but they earn six times the wages. This wage disparity makes it incredibly challenging for U.S. companies to compete in labor-intensive industries, regardless of how efficient their operations may be. As a result, the U.S. manufacturing sector has shifted towards high-value, specialized industries, while labor-intensive operations have moved to lower-cost countries like Vietnam and Cambodia.
Much of the rhetoric surrounding a manufacturing revival in the U.S. is driven by political motivations rather than economic realities. The promises to revitalize domestic manufacturing may resonate with swing states in the Rust Belt, but policies aimed at reversing industrial job losses have not yielded significant results. While efforts like the Biden administration’s Inflation Reduction Act (IRA) have led to substantial investments, the focus has mainly been on semiconductors, neglecting other crucial sectors like electric vehicles and green energy technologies. Issues like a lack of skilled labor and bureaucratic red tape have further complicated the situation, raising doubts about the long-term impact of these policies.
Amidst the ongoing discussions about a U.S. manufacturing renaissance, a new trend is emerging – the rise of “friend-shoring.” U.S. companies are increasingly moving production to countries with similar wage levels and economic complexities as China, but with lower geopolitical risks. Nations like Vietnam, Malaysia, Mexico, and India stand to benefit from this shift as companies seek alternatives to China. This realignment of global supply chains presents new opportunities for investors, even as the prospects of a domestic manufacturing revival in the U.S. remain uncertain.
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