Monday, March 12, 2012

The incredible revival of U.S. manufacturing? Credit trade and energy

By James Pethokoukis

The post-Great Recession revival of U.S. manufacturing has given the economy a much-needed boost during the Not-So-Great Recovery. Some great factoids and observation from economist Jim Glassman at JPMorgan:

1. Factory output is only five percent below the all-time record high level of production reached in 2007 before the economy tumbled into recession.
2. Seventy-five percent of current manufacturing capacity is being used and that is up sharply from 65 percent at the bottom of the recession.
3. And the job count at manufacturing establishments, which tumbled from 17 million at the turn of the New Millennium to just under 12 million currently, again are growing.
4. In fact, “manufacturing” never left. What did was assembly-type jobs. Indeed, viewed from the perspective of the value added contributed in the manufacturing chain, the US factory base was always strong. Industrial output in the US continued to climb throughout the globally turbulent 1990s and 2000s, even as US factory jobs vanished.
Two big factors are in play today. First, years of massive trade deficits with Asia served as kind of an unintentional Marshall Plan, helping the region develop and eventually “return the favor,” as Glassman puts it, by “creating new markets for American businesses and those in the developed economies more broadly. In other words, the trends that were contributing to the phenomenon many thought of as ‘outsourcing’ are reversing.”
The other big factor is energy. Glassman:
The development of gas shale fields and the required infrastructure needed to deliver this new source of energy is one source of demand. At the same time, the new discoveries of domestic natural gas that are reflected in the unprecedented divergence of oil and gas prices on a thermally-equivalent basis is encouraging the petrochemical industry to rebuild its US operations. For decades, they have been moving operations elsewhere, nearer to foreign sources of natural gas, on the assumption that domestic sources of natural gas would be disappearing. No doubt, the activity spawned by a shift in the economy toward greater use of natural gas, in response to the powerful incentives low relative prices of natural gas create, will generate demand that goes well beyond that of these sectors.
Still, Glassman cautions about being overly optimistic about job creation:
Lights are coming back on in the nation’s manufacturing sector. The evidence is fairly clear on that. The industrial revival represents a new sponsor for the US economic recovery and that is a marked change from the lean years in this millennium for these businesses. But the job opportunities will require greater skills and that has modest implications for the jobs recovery in that sector as well.

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