It is perceived wisdom that the U.S. economy has been shifting from manufacturing to services. This is believed to be an inevitable trend for most developed countries as they lose manufacturing to lower wage countries via offshoring.
The U.S. Labor Department data tracks employment by industry groups which can be classified by either goods production or services. Figure 1 shows the ratio of the two since 1939.
Note that the employment percentages were balanced in the late 1930s. Manufacturing then surged as the country prepared for and fought World War II. By the 1950s, manufacturing employment moved downward and services employment trended upward.
Figure 1 clearly shows that this long-term, “inevitable” trend stopped about 12 years ago. The ratio went flat around 2010 and has remained unchanged since. Figure 2 confirms this observation. Current manufacturing employment is about 6 million higher than one would have predicted in 2008.
The exciting trend of the past 12 years is largely due to less offshoring and more reshoring and foreign direct investment. A smaller percentage is due to less rapid productivity growth than in earlier periods. What can we conclude? Manufacturing has stabilized, and it is time for dramatic growth as reshoring surges.
The Way Forward: Increasing U.S. Competitiveness
The United States should put new emphasis on strengthening the quality and quantity of its manufacturing workforce. To balance our $1.2 trillion goods trade deficit, the country needs to increase its production capacity, increase its workforce, and lower manufacturing costs. Ideally, we need to increase the manufacturing workforce by 40 percent, or approximately 5 million people, over the next 20 years. To do that, we will need to add 250,000 workers per year in excess of losses to retirement. Apprenticeships and immigration are the best means to close the skills gap.
The government should lower the value of the U.S. dollar. Most economists agree that the dollar is overvalued by 25 to 30 percent, due to its status as the world’s reserve currency. This “exorbitant privilege” makes the U.S. a great location for banking and a poor location for manufacturing.
The U.S. should address its tax policy. The most timely action is to maintain immediate expensing of capital expenditures. The 100 percent rate established in the 2017 tax bill has started to phase out in 2023. Investments in needed productivity will decline.
U.S. manufacturing will need to add 250,000 workers per year over the next 20 years.
The U.S. should reduce the cost of healthcare and end the practice of employer-provided, tax-free healthcare. Healthcare costs are incorporated in every manufacturer’s overhead, driving up costs and prices. For U.S. companies, healthcare expenditures per employee alone are about equal to what Chinese companies pay for employee wages.
These measures underpin the Reshoring Initiative’s Competitiveness Toolkit. The first two alone would balance the U.S. goods trade deficit over time. These actions show that enabling domestic production and re-industrialization is highly feasible. The time to act is now. We should rejoice for the stabilization of the last 12 years and commit to closing the gap vs. services dramatically over the next 20 years.
Are you thinking about reshoring? Now is an especially good time for companies to re-evaluate the choice of domestic vs. offshore production and the resulting impact on sustainability. Our mission is to get companies to do the math correctly using our Total Cost of Ownership Estimator (TCO). By using TCO, companies can better evaluate sourcing, identify alternatives, and even make a case when selling against offshore competitors.
For help, call me at 847-867-1144 or email email@example.com.
About the Author
Harry Moser is the president of the Reshoring Initiative. His column will appear every other month, alternating with Austin Weber’s “On Campus.” Has your company reshored production? Are you thinking about it? We’d like to hear of your success or help you achieve it. With your approval, we would love to report on your successes or opportunities in future issues. Contact firstname.lastname@example.org.