US manufacturing revival?

Wednesday 10 August, 2011

A full house attended  MADE IN AMERICA: A REVIVAL IN U.S. MANUFACTURING? by the Chicago Council on Global Affairs.  The event was moderated by 1 of my favorite economists Diane Swonk, & featured Chad Moutray of the National Association of Manufacturers, Bill Strauss of the Federal Reserve Bank of Chicago, & David Beebe of Navistar.  Diane opened by noting that recent trade statistics are worse than when we were in the great depression.  We’re down $3B in imports from Japan as a result of changes in the automobile supply chain & the disasters in that country.  There have been structural shifts, such as wage differentials narrowing.  Productivity & transportation costs have soared.  Midwest manufacturers have protected their high-value-added production intellectual property by onshoring.

Moutray stated that American manufacturers are the most productive in the world, generating $1.6TR & 11% of US’ GDP & 9% of employment, but lost 2.3M manufacturing jobs & only gained 245K back.  86% have favorable expectations about the next 12 months, with an expectation of +5% in sales & 1.8% expect a raise.  The rising cost of raw materials is a problem, leading to expectations of 2.3% & 3.6% expectations for growth the next 2 years.  The US needs to attract foreign direct investment & do more research & development.  American costs are 18% higher than our competitors because corporate taxes are too high, for example compared to Canada where they’re only 16%.

Bill Strauss started off talking about the disconnect between manufacturing & policy.  Manufacturing’s share of the economy has fallen since World War II to 9%.  Increased productivity has raised output 600%.  Agriculture now only employs 1.6% of American workers.  Oil prices have increased logistics costs, so supply chains are localizing & not globalizing.  The economic downturn hit the midwest hard:  2.3M of 8.7M manufacturing jobs were lost.  We’ve seen 6.9% growth in the recovery since June, 2009 driven by increased productivity & not hiring.

Beebe said this recession is the worst in the last 50 years.  Navistar added to it’s portfolio to strengthen it’s position in the market & added that product development is key to technology exports.  He offered 4 keys to growth:

  1. focus on operations costs & breakeven
  2. expand your portfolio by leveraging your platform
  3. use a flexible manufacturing strategy with your people, products, & assets
  4. enter non-cyclical markets, such as the military

He’s optimistic as Chinese costs are closing & logistics costs are rising, the total cost equation has shifted.  We do need to reduce our corporate tax rate, encourage more free-trade agreements, & reduce regulations.

Panel Q&A

  • There are tradeoffs to reduce corporate tax rates.  R&D tax credits have been on & off again.  An onslaught of regulations hit disproportionately on SME’s.
  • We need to create a level playing field & keep balanced to bring back manufacturing to the US.  Corporations don’t pay taxes:  individual income & sales taxes fund government.  Those costs are passed along.
  • Colombia could be a big success if congress even passes that free-trade agreement.  We need to restart the Doha round talks.  The rest of the world is not stagnant.  The US can’t rest on it’s laurels.
  • It’s difficult to hire engineers today.  We need to keep educated immigrants in the US.
  • Manufacturing comprises 60% of US exports & were +14.5% last year.  We need 15%/year to double our exports to meet President Obama’s National Export Initiative goal.  Trade increases as goods get smaller.

Open Q&A

  • The world can learn from Germany’s educational system.
  • When an economy falters, the currency of that economy takes a hit.  The reverse it true in Germany.  If the Deutsche Mark were to return, it would be strong.  But in some ways exporting is overblown:  proximity matters.  Interstate American trade=some international trade.
  • The Chinese currency has appreciated since 2005 @ the real rate of inflation +10%. Companies are moving to western China.  There is upward pressure on wages in China.  Chinese labor markets are similar to those in the US.  China had 98M workers in manufacturing in 1995 & 83M in 2002.
  • Democrats are requiring trade adjustment assistance.
  • Manufacturing extension programs are contributing to SME job growth.  These manufacturers are highly innovative & do 2/3 of the research & development in the US.
  • The economic downturn seriously impacted innovation & venture capital, but that has now turned around.  Banks are looking for business. Some businesses are switching banks if their current provider isn’t meeting their needs.
  • Automakers supported bailouts of competitors to maintain their supply chains.  Market economies are very scary after a financial collapse.  We hit bottom in mid-2009, & could have been in a death spiral in 2010-11, but it’s been called a depression to frequently.  We won’t come out ahead, but it could have been worse.
  • Navistar has not constructed a new plant in the US for a long time, but they have created flexibility in that now they can make all their models in different locations.  Now they take a system-wide view on costs to determine where to produce.
  • Job creation is happening now as we create new export markets.  Jobs created for ancillary markets are important.

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