Many believe the U.S. cannot compete with China on a manufacturing basis. While the U.S. is unlikely to employ as many manufacturing workers as it did in the 1970s, it is much stronger — and competitive — than most assume.
This time on FS Insider we spoke with Lauren Saidel-Baker at ITR Economics to discuss their outlook on the U.S. economy and on the factors making America's manufacturing great again.
Slower Growth, But No Real Recession
ITR's leading indicator signals that while the U.S. economy is currently doing well, there is potential trouble on the horizon. Saidel-Baker said the U.S. is in an accelerating growth trend right now, but that can’t last forever.
The ITR leading indicator shows that as we move into the 2019 economy, manufacturing will pull back, though only mildly.
“This is not a recession or any severe downturn,” she said. “Really, it’s just a slower rate of growth going forward next year.”
“Honestly, I'm hesitant to even use the ‘R-word,’ recession, because when I do everyone jumps back to that 2008 mindset. The industrial economy might contract, most likely later in 2019 or into 2020, but this will be the mildest recession we've had in at least the past 50 years.”
U.S. Manufacturing: Stronger Than You Think!
We often hear from economists that U.S. manufacturing is dead, but this couldn’t be further from the truth. In the U.S., manufacturing production has more than doubled since its peak in the 1970s.
In fact, our manufacturing production index is close to all-time-high levels, Saidel-Baker asserted. Going forward, she expects more growth, and that manufacturing will support U.S. industry.
The decrease in manufacturing employment is what sticks most in people’s minds, Saidel-Baker stated, but it's important to distinguish between the number of people required for manufacturing jobs and the actual output of the manufacturing sector, which has more than doubled its production in the past 50 years.
“It just doesn't take 100 people on an assembly line, screwing tops on bottles or whatever it is anymore. We have this technology, we have the AI and the robotics that can either assist human workers or just do those jobs repeatedly for them.”
Closing the Gap
The U.S. has closed the manufacturing gap with China substantially, Saidel-Baker stated.
While it is cheaper to hire workers and build factories in Asia, their competitive advantage hasn’t persisted. In recent years, we've seen labor costs in Asia start to rise between 15 and 20 percent per year, with no corresponding increase in productivity that we would expect to see in the U.S. with similar increases.
U.S. manufacturing is leveling the playing field with factors like cheap energy, engineering automation, and AI.
“Whereas in 2004, China had a 15 percentage point advantage, in 2016 they only had a 1 percentage point difference,” Saidel-Baker said. “We closed that gap markedly, and we only see that increasing going forward. Robotics are advancing by leaps and bounds. We have political and economic stability, things like the rule of law applying. That's very important if you look at things such as intellectual property in China. So we do expect this gap to fully close in the near-term, such that it will be less of an advantage to move out to China.”
Listen to this full podcast with Lauren Saidel-Baker by clicking here. For more information about Financial Sense® Wealth Management and our current investment strategies, click here. For a free trial to our FS Insider podcast, click here.