The Fragile Hope of a Manufacturing Renaissance

Optimists say US manufacturing is rebounding and holds the promise of a renaissance. Pessimists contend that's a load of malarkey. They say manufacturing is too far gone and will never reclaim its former status.

The reality is probably somewhere in between. Given the volatile state of our economy, the most accurate assessment is that manufacturing is poised for a comeback.

Some industries -- automotive and construction machinery -- are bouncing back. Others, such as household appliance manufacturers, aren't nearly as healthy.

Up-and-coming industries, such as clean technology (renewable energy and such) and lithium-ion battery manufacturing, have potential. But the sectors are still too small to make a measurable impact.

The primary booster of manufacturing right now is exports. Driven by demand from emerging markets around the world, US exports rose 21% to $1.28 trillion in 2010. Demand for US goods has continued this year, thanks in part to a weak dollar, which makes our goods cheaper abroad.

Demand for cars and planes boosted factory orders for July, up more than expected. The Commerce Department reported that July orders for manufactured goods were up 2.4%, compared to June, to $453 billion.

Caterpillar Inc. (NYSE: CAT), which makes bulldozers and other construction machinery, is one of the companies leading the charge in exports. Caterpillar reported $14 billion in revenue in its second quarter, up 37% from the same quarter a year earlier. The company says it's seeing demand around the world.

Cummins Inc. (NYSE: CHI), which makes engines for construction machinery, also is seeing demand for its products, especially in China, India, and Brazil.

Now for the ugly truth: A manufacturing recovery might not come with a boom in US jobs. As productive as workers are, technology has won that battle. Automation has made manufacturers more productive with fewer workers. That's not going to change.

The reality: Six million jobs have been lost in manufacturing between 1997 and 2009, mostly due to offshoring and automation. However, from the end of 2009 through July, manufacturing has gained about 616,000 jobs (both durable and nondurable goods). Only 5.4 million to go!

A few trends could boost manufacturing jobs in the future, including rising wages in China, where demand for skilled workers is outstripping supply. As the wage gap between the US and the world's largest manufacturing country narrows, the climate for manufacturers in the US becomes more appealing, especially in low-cost states such as Alabama and Mississippi.

There's also a push to get US companies to "reshore" -- to move production back to the US. Proponents of reshoring say political instability, high shipping rates, and trade secret thefts are among the added costs of producing goods overseas.

Some companies on the forefront of reshoring include Ford Motor Co. (NYSE: F), Wham-O Inc., which makes Frisbee discs and Hula Hoop toy hoops, and NCR Corp. (NYSE: NCR), which makes ATMs and other kiosks. More on reshoring in a later post.

But what manufacturing could really use is a recovered American consumer -- who has a job, gets raises, and feels financially secure enough to buy things. Until the consumer is back, we're not likely to see manufacturing soar.