The manufacturing industry in the United States is showing signs of recovery. Last year, U.S. automakers such as General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) reported strong sales performance, an indication that the auto industry is booming.
Both companies projected that they’d experience continuous growth in the future. General Motors Company (NYSE:GM) recently announced that it would hire 1,000 workers for its new Information Technology Center in Atlanta, Georgia, while Ford Motor Company (NYSE:F) said it would double its dividend for the first quarter this year.
Last week, a report from analysts at Bank of America said North American automakers will enjoy positive financial performance in 2013. According to the analysts, one possible factor that might affect the growth of auto sales is a global slowdown led by problems in the European region.
The research firm noted, that over the past several years, the U.S. manufacturing industry experienced an influx of high profile capital goods investments from companies. According to them, the motivation behind the investment decisions is broad and oftentimes company-specific.
The analysts also cited several factors driving the rise of U.S. manufacturing including geo-political, bullish outlook on U.S. energy, supply chain management, state and local tax incentives, accommodative labor unions, innovations in automation, typical late cycle demands. In addition, the inflation of wages in emerging markets and supply chain dislocations caused by natural disasters were also key drivers.
The report from Citi Research Equities projected that U.S. manufacturing will continue to grow, particularly machinery and automation companies such as Emerson Electric Co. (NYSE:EMR), General Electric Company (NYSE:GE), and United Rentals, Inc. (NYSE:URI) among others.
The analysts from Citi Research Equities wrote, “The search for low-cost labor and optimized supply chains has driven outsized investments in emerging markets, but wage inflation is eroding their appeal as global manufacturing export centers.” According to them, China’s labor compensation grew rapidly with an 8 year CAGR of 14 percent, which narrowed the wage gap that took manufacturing jobs away from the United States.
Could manufacturing within the US economy be bottoming?
Manufacturing was once a powerhouse of the US economy, generating roughly a third of total economic output in the early 1950s and 1960s. However, a steady erosion has taken place since then, as the US shifted to a more services-driven economy at the expense of manufacturing jobs.
One indicator of this trend is the level of industrial electricity consumption by the US manufacturing sector, which has fallen by 18%
from 1998 to 2010. This was partly attributed to more energy efficient industrial processes, but also reflects the sector’s general slowdown. Manufacturing activity in the US is stalled around the same levels as ten years ago (adjusted for inflation) and has only increased at a 1% CAGR over the past twenty years.
While manufacturing output in pure dollar terms has grown at a steady pace, the sector as a percentage of national GDP has fallen from over 35% in the 1950s down to around 12% in 2011, illustrating the shift towards a services-driven economy, away from manufacturing and away from US shores. However, the rate of decline has stalled in the past decade, likely having bottomed out and achieved its minimum potential share of the economy. If conditions optimize in the near-term, the US could see a resurgence in the contribution of manufacturing output to total GDP, however it is unlikely that it will ever recover to pre-1980 levels.