The U.S. manufacturing sector has rebounded and seems poised for more growth.

But is the revival as real as some have characterized? A number of recent reports have described the resurgence in manufacturing as a modest rebound rather than a boom. Even more compelling, some suggest the renaissance is over. This article takes a closer look at where the industry stands at midpoint 2016.

The Bright Side

Let’s start with the good news. Approximately 900,000 jobs were added to the U.S. manufacturing sector between 2010 and 2016. There’s no denying the positive impact of that growth. However, after taking a brutal beating before that, some recovery had to be expected. By most standards, the improvement was modest.

Plus, a true return to more manufacturing activity in the United States, sometimes called “reshoring,” should be backed by other data, including increased productivity in consumer goods. Although the nation has been importing more vehicles than it has been exporting for several decades (with Japanese and German automakers dominating the market) some traditionally strong sectors have eroded, including airplanes, medical equipment and semiconductors. Also, other longstanding areas of growth (oil and gas, mining and construction equipment) have slowed considerably.

Studies of U.S. manufacturing activity have produced a mixed bag of conflicting results:

1. Boston Consulting Group, which helped popularize the concept of reshoring, has said that a number of top manufacturing executives are considering bringing back production from China. Thirty-one percent of respondents to the group’s fourth annual survey of senior manufacturing executives at companies with at least $1 billion in annual revenues said that their companies are most likely to add production capacity in the United States within five years for goods sold in the nation, while 20% said they are most likely to add capacity in China.
2. A.T. Kearney, however, says its U.S. Reshoring Index suggests that reshoring is an aberration, not a trend. That index tracks actual U.S. manufacturing and import data. Kearney also notes that industries trying to avoid rising labor costs in China have been moving production to other Asian countries rather than back to the United States, a trend that is unlikely to reverse anytime soon. Countries in Southeast Asia, including India, have literally hundreds of millions of workers available in largely untapped pools. This is clearly apparent in activities such as clothing and furniture production. Another development affecting manufacturing is “nearshoring” on the North American continent, particularly in Mexico where labor costs are low.
3. Information Technology and Innovation Foundation (ITIF), a nonpartisan think tank, suggests that the so-called renaissance doesn’t exist. It notes that the real manufacturing value added, which it says is the best measure of U.S. manufacturing, was still 3.2% below 2007 levels in early 2015, despite GDP growth of 5.6%. Among other “myth-busters,” the ITIF report, The Myth of America’s Manufacturing Renaissance: The Real State of U.S. Manufacturing, illustrates that wages in China are estimated to be just 12% of average U.S. wages in 2015, global shipping costs are back to normal after falling by 93% in a six-month period in 2009 and U.S. productivity isn’t increasing faster than that of other industrialized countries. And it is actually growing much slower than China and South Korea.

Clearly these results suggest that the so-called renaissance has been highly overrated.

The Current Landscape

The economic outlook for manufacturing darkened somewhat in June. The sharp drop in hiring prompted the Federal Reserve to keep interest rates steady. The manufacturing sector lost 10,000 jobs and it showed job losses in three of the four most recent months. Year-over-year growth in manufacturing employment has been negative for three months in a row. The numbers have led some observers to suggest the end of any post-recessionary manufacturing resurgence.

What’s the reason for the turnabout? The Bureau of Labor Statistics published its Job Openings and Labor Turnover Survey the same week as the jobs report suggesting that jobs weakness in manufacturing may be the result of a lack of labor supply rather than lack of demand. In April, job openings in the industry jumped to a 15-year high while the ratio of manufacturing job openings to manufacturing job hires hit a record, suggesting that employers are having trouble finding quality workers to fill open positions. In the meantime:

• Layoffs remain relatively low, with fewer reported this cycle than at any point during the previous cycle,
• Manufacturing wage growth outpaced overall wage growth over the past manufacturing year, and
• The unemployment rate for manufacturing workers has been comparable to the three years leading into the most recent recession, when the economy was stronger.

All of this seems to indicate that the manufacturing sector is healthy.

What can manufacturers do about increased labor costs due to a shortage of qualified workers? One possibility is to increase overtime hours for workers on the payroll. Alternatively, if output from existing workers is nearing its limit, wages may be increased to attract new-hires from other sectors, even if this slightly dilutes the bottom line. Other solutions, such as locking in output and sacrificing the potential for growth, may be more difficult to swallow.

Final Word

Whether you believe that the manufacturing renaissance is over, or you aren’t convinced that any revival was particularly robust or even existed, shouldn’t discourage your firm from its main focus. Stick to the fundamentals that your company has relied on: Remain diligent but retain enough flexibility in operations so your firm will be able to adapt quickly, if needed.