Can manufacturing make a comeback?

Abandoned manufacturing facility

A recent article in Harvard Business Review suggests that the stage is being set for a resurgence of manufacturing in the US. This is primarily due to rising Chinese wages. This pattern has played out around the globe with Japan for example, which used to be the low cost supplier, giving way to Mexico, which then gave way to Korea and now, China and India.

The author cites statistics from The Institute for Supply Management, which reported an increase in U.S. manufacturing over the past 24 months. The Federal Reserve reported a 0.6 percent increase in manufacturing in July 2011, with a year-on-year gain of 3.8 percent.

With Chinese wages in some regions going up by 15-20 percent, they are now only around 30 percent lower than the US, which, when combined with the rising renminbi (China’s international currency) and the higher productivity of American workers, gives Chinese goods made there only a relatively modest cost advantage, which could easily be nullified once shipping is taken into account.

This makes U.S. goods, particularly in the Southeast, attractive once again, which explains, at least in part, major investments in that region for new plants by Volkswagen (Tenn.), Embraer (Fla.) and Mitsubishi (N.C.).

So far, so good, but there are other sides to this story, especially if one takes a longer time frame into account. For one thing, the two year uptick in manufacturing output came after a relatively brief downturn that started in 2007. Prior to that, output has been steadily rising (with a couple of other brief dips) since 1975, more than doubling in that period. In other words, it’s not manufacturing  that has fallen sharply, it’s manufacturing jobs.

The thing that seems to linger beneath the radar is the fact that manufacturing productivity, the amount of goods produced per worker, has soared. In fact, productivity rose from $80,000 per worker to $280,000 per worker during the same time frame. But, here is the piece that we usually hear about out of context: the number of manufacturing jobs fell, since 1975, from roughly 17 million to just a little over one million, about a 92 percent drop.