Why is U.S. Manufacturing Allegedly Thriving?

Now, more than ever, manufacturing is making important contributions to our economy.

According to the National Association of Manufacturers (NAM), U.S. manufacturing accounts for more than 17 million, well-paying American jobs, and output has increased by 18 percent since the official end of the recession in 2009.

For the first time, manufacturing contributes more than $2 trillion to the U.S. economy, 12.5 percent of America’s gross domestic product.

Why is U.S. manufacturing thriving?
One reason is the availability of affordable energy. An October 2014 report by the International Monetary Fund showed that exports of manufactured products have risen 6 percent since the start of America’s shale-gas production boom. It’s a sign that plentiful, affordable natural gas is benefiting U.S. manufacturing. Low oil prices are helping as well.

Another very real contributor that some may find surprising is competitive labor costs. A report published last year by the Boston Consulting Group noted the U.S. as one of the developed world’s most flexible labor markets. It accounts for the highest worker productivity, by a considerable margin. Adjusted for productivity, U.S. labor costs are an estimated 20-54 percent lower than those of Western Europe and many countries in Asia for some products.

The Trade Implications of the U.S. Shale Gas Boom
The shale gas boom has led to a debate in the United States about whether relaxing the restrictions on exporting natural gas would diminish the gains in external competitiveness resulting from lower domestic natural gas prices.

As noted in the text of the Special Feature, the boom has led to a decoupling of U.S. natural gas prices from those in Europe and Asia since 2005, and the resulting price differentials are expected to persist. At the same time, the share of energy-intensive manufacturing exports in total U.S. manufacturing exports has been rising steadily, whereas the share of non-energy-intensive exports has been declining (Figure 1.SF.1.1).

Figure 1.SF.1.1. Manufacturing Sector Exports
(Percent of total U.S. manufacturing exports, unless indicated otherwise)

Source: IMF staff calculations.

This box sheds light on the global trade implications of international differences in natural gas prices using the U.S. shale gas boom as a natural experiment. The main finding, based on sector-level data, is that the current gap between U.S. prices and those in the rest of the world has led to a 6 percent increase, on average, in U.S. manufactured product exports since the start of the shale gas boom.

Even though natural gas and energy costs in general represent relatively small shares of total input costs, the lower natural gas price in the United States, which is likely to persist, has had a noticeable effect on U.S. energy-intensive manufacturing exports.

We need the help of our elected officials to continue this momentum. Substantial policy changes that encourage manufacturing in the U.S. are critical, and we need to ensure our elected leaders make this a priority.

To achieve this, we must first address our national tax system to make it more competitive, encourage innovation and spur investment, job creation and economic growth. Key ingredients for a comprehensive tax reform plan include a lower corporate tax rate; a strong, permanent and competitive R&D incentive; a modern international tax system; and a robust capital cost-recovery system.

Continuing to grow our skilled manufacturing talent pipeline begins with enhancing our education system. To compete and succeed globally, U.S. manufacturers require a high-quality, highly skilled workforce. According to the NAM, more than 80 percent of manufacturers currently report difficulty in filling positions that require skilled workers. We must work with policy makers to increase STEM education to address the ongoing skills gap and build the 21st-century workforce that manufacturers need.

Attracting talent from outside the U.S. is also a fundamental component of a strong talent pool for manufacturers. We need to improve the employment-based green card system to keep diverse talent in the U.S., streamline and simplify procedures for temporary or non-immigrant visas and allow for temporary workers and immigrants to meet the needs of employers without displacing American workers.

Lastly, policy makers must create an environment where regulation isn’t a hindrance to growth. Dollars spent by manufacturers on regulatory compliance for unnecessarily cumbersome or duplicative regulations are funds manufacturers could spend on capital investment or hiring new employees.

Related: The Myth of America’s Manufacturing Renaissance