Demographic changes, technological development and changing global cost structures now promise to make America among the most competitive manufacturing nations in the world.
For decades, manufacturing has been viewed by many people as an industry on the decline in the United States. As the American economy shifted ever more heavily towards services, factory employment in the country has steadily deteriorated. American manufacturing employment peaked at nearly 19.5 million in 1979, and has been steadily on the decline since then, averaging around 12 million throughout the 2010s.
In addition, the past several decades saw the emergence of substantial, low cost, rival manufacturing centers around the globe – particularly in Asia.
Despite this there are indications manufacturing in America has a dynamic future. There are at least three reasons to be optimistic about the future of manufacturing in America.
1) Energy Prices
Manufacturing is a very energy-intensive economic sector. Not only are electricity demands for industrial production enormous, but natural gas and other petroleum inputs are foundational raw materials for many products. Numerous chemicals, including plastics and fertilizer, are manufactured using natural gas. In 2021, the U.S. Energy Information Agency reported industrial energy consumption was 25% greater than residential and commercial consumption combined.
Given the intense energy consumption of industrial production, energy prices play an enormous role in determining the competitiveness of a country’s manufacturing sector, and global trends indicate that America will enjoy a substantial advantage in this regard. The United States has an advantage among several industrialized countries with its indigenous production of oil, natural gas and electricity, making the country essentially self-sufficient in all three of these energy products. Even more notably, the U.S. – unlike many countries in Europe and Asia – has geographic advantages that allow cost effective use of renewable energy sources like solar and wind.
In short, not only does the U.S. have self-sufficient indigenous production of all the current key energy sources, but it also has generation potential in future sources. This gives the country a tremendous competitive advantage in energy prices. In December 2021, U.S. businesses faced an average electricity cost of 11.5 cents per kilowatt hour, compared with 16.1 cents in Japan, 24.6 cents in the United Kingdom and 31.6 cents in Germany. America’s advantages in natural gas are even more substantial. Spot prices for natural gas in both Asia and Europe have consistently been more than 10 times as high as U.S. prices throughout 2022.
The implication of these diverging energy prices is a radical boost to American cost competitiveness. Already, European manufacturers – faced with crushing energy prices – are beginning to move production to the United States. In the long run, American energy generation potential promises to keep American manufacturing cost competitive and continue to draw energy intensive industry to the United States.
The aging populations around the world have become a major point of importance in economics. Like the U.S. many countries experienced baby booms throughout the 1950s and 60s, as economies began to recover and eventually flourish after World War Two. That generation is now reaching retirement years – not just America’s baby boomers, but also their counterparts in Europe and East Asia. One way in which boomers are unique, however, was the number of children they had compared with later years.
In the 1990s, America’s birth rate remained stable, at a little over two children per woman. This resulted in another large generation being born in America: more than 70 million millennials. Unlike the baby boomers, who have similarly large counterpart generations around the world, America’s millennials are mostly alone. While families in the U.S. were growing in the 1990’s, birth rates collapsed far below replacement rates in most of the industrialized countries around the world.
This demographic divergence is now beginning to make its impact on workforce availability. The millennials born in America — roughly from 1981 to 1996 — provided an enormous addition to the workforce to offset the mass retirement of the baby boomers. In other parts of the world, however, where birth rates were low in the 1990s, no such offset exists. The labor force in the European Union is expected to shrink by 9% by 2060. In Japan, a decline of more than 20% is forecasted, while in China – where the working age population has been in decline for over a decade already – a drop of 23% is expected by 2050.
While America’s population and labor force growth have slowed considerably over the past decade, in global context, the U.S. has far more favorable demographics than any other industrialized economy. The Bureau of Labor Statistics expects the American labor force to grow by 0.5% over the next decade – a low growth rate, historically, but vastly more favorable to the situation in European and Asian countries where the labor force is set to shrink outright, in some cases dramatically. So, while America is positioned to maintain a stable labor force, other manufacturing nations will increasingly be forced to search for solutions via automation or moving their production out of country.
3) Changing Technologies
Anxiety and worry about automation are not new, like the ever-present concern is that robots will “steal jobs” from human workers. In fact, automation in the United States is at relatively low levels. The National Bureau of Economic Research estimated in 2018 that there are roughly nine industrial robots per 1,000 manufacturing workers in the United States – a low density compared with countries like Germany (16.95), Japan (14.2) and South Korea (20.14). The bureau concluded automation in the United States has been lower than in other leading manufacturing countries because American demographics are excellent; with a stable workforce, there is less pressure to automate than in countries where the workforce is shrinking. More recently, this has been reinforced by frenzied efforts in China to automate factories in the face of a declining labor pool.
What this means, implicitly, is that the U.S. still has untapped benefits to be gained from robotics and other emerging technologies – and despite low levels of robotic use, America still has one of the most productive manufacturing sectors in the world. It also ranks first in the world in annual value added per manufacturing worker, per data from the World Bank and the Organization for Economic Cooperation and Development.
America’s world leading productivity only promises to increase in the future as new technologies are adopted. Digital operations technology promises to make factories more efficient, while additive manufacturing technologies (such as 3D printing and rapid prototyping) reduce waste and simplify supply chains. And of course, there remains untapped output upside from adopting robotics on a larger scale.
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Ultimately, a host of factors are converging to create ideal conditions for a manufacturing renaissance in America. The pandemic threw global production and shipping into chaos and sparked strong interest in shifting production closer to home to simplify supply chains. This has happened while shifting demographics and energy markets have made America more competitive than ever. No industrial enterprise can function without energy and workers, and the nation has both the most abundant energy and the most stable demographics of any large manufacturing nation. These assets, combined with the world’s richest consumer market, will continue to draw industrial enterprises to the United States, promising to make the words “Made in America” commonplace again.
Sam.Wolkenhauer@labor.idaho.gov, regional economist
(208) 457-8789 ext. 4451