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5 Drivers of Manufacturing Strength in the U.S.

5 Drivers of Manufacturing Strength in the U.S.

May 1, 2017

Despite a widely held belief that China has overtaken the U.S., the U.S. is still well positioned as the global leader in manufacturing, according to Alan Beaulieu of ITR Economics. Manufacturing production in nearing its prerecession record high and foreign direct investment (FDI) continues to rise.

"People are betting on the United States," Beaulieu told attendees of the 2017 ISA Annual Convention last week. And those bets will likely continue to pay off, driven by five core factors.

1. Near-sourcing: As labor and logistics costs associated with manufacturing in places like China rise, the cost savings associated with manufacturing overseas have evaporated. On top of that, more foreign companies are investing in the U.S. to be close to our market and our consumers. FDI into the U.S. from all countries in all industries rose 12 percent in 2016, according the Bureau of Labor Statistics.

Manufacturing near the market in which you wish to sell has several benefits, according to Mona Pearl, author of Grow Globally: Opportunities for Your Middle-Market Company Around the World, including the ability to understand local customs and preferences – and the flexibility to adapt when those change.

2. Technology: The U.S. is also still a leader in technology investment and training. In manufacturing, automation, robots and machine learning have already found their ways into everyday operations – and adoption continues to accelerate.

3. Capital vs. labor: While labor costs in China rise, they've remained relatively stable in the U.S., according to Beaulieu, which means that the overall cost of production in the U.S. has come down in relation to other geographies. But this may change if the U.S. embarks on protectionism and seeks to shut out the flow of immigrants from Mexico, he notes. Reducing the labor force leads to higher competition for available labor, which in turn leads to higher costs for that labor.

4. Energy: The U.S. has enough fossil fuel resources in the ground to keep it energy independent for 300 years, Beaulieu notes. Add in opportunities from alternative energy, and the U.S. is fully capable of achieving independence – though we haven't severed foreign energy relationships yet.

As a result, energy costs in the U.S. are relatively low when compared to other developed nations, an attractive prospect for manufacturers looking to reduce their overall costs.

5. Consumer base: The U.S. market is extremely attractive for manufacturers, Beaulieu says. While China and India may have more people, those consumers don't have the same buying power as consumers in the U.S. And there are no signs that U.S. citizens plan to stop consumption – or even significantly reduce it. Disposable income in the first quarter of 2017 was up 4 percent over the same period in 2016, according to the BEA. And while consumer spending during March and February were flat, that was primarily driven by lower inflation. The U.S. has a strong market for selling into, and manufacturers have their eyes on it.

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