Secular Resurgence of U.S. Manufacturing

The U.S. manufacturing sector is in the early innings of a long-term resurgence that will likely have far-reaching effects across the economy. While the sector lost many jobs during the past decade, this period of major adjustment has allowed manufacturing to emerge with greater efficiency and competitiveness.

Since 2002, U.S. manufacturing output has increased 17%, but costs have declined in several areas. Manufacturers reduced their unit labor costs significantly, and when paired with the weakness in the dollar over the same period, U.S. manufacturing labor costs have become much more competitive versus other economies in the global market. In addition, manufacturing has benefited from dramatically higher energy efficiency and lower energy prices. Even with the increase in output, energy consumption has fallen 16% since 2002, and U.S. prices for natural gas and electricity—which respectively constitute 30% and 13% of manufacturers’ energy needs—are now among the lowest in the world, thanks to technological advancements in shale production that have yielded a natural gas bonanza.

Despite the sector’s share of GDP contracting from 28% in 1953 to 12% in 2010, manufacturing remains an important contributor to U.S. economic growth.  Globally, manufacturing employment has tended to fall due to productivity gains and competitive pressures, and the U.S. has been no exception–manufacturing has shed 3 million jobs since 2002.  After the recession, however, U.S. manufacturing employment has slowly improved and should continue to benefit as domestic and foreign firms relocate to profit from the improvement in U.S. competitiveness and to avoid the high costs of shipping and supply chains.

Manufacturing may have the largest multiplier effect of any sector in the economy. According to the National Association of Manufacturers, every $1 in final sales supports $1.34 in economic activity in non-manufacturing sectors such as construction and services. Manufacturing also contributes significantly to national productivity growth and provides about two-thirds of private sector research and development.  And with manufactured goods comprising more than 50% of U.S. exports, a healthy manufacturing sector has broad implications for trade deficit reduction.  The resurgence in U.S. manufacturing is thus poised to provide a broad-based tailwind for the U.S. economy for years to come.

Source: Fidelity Investments