On Air Now

Upcoming Shows

Program Schedule »

Tune in to Listen

650 AM Hibbing, Minnesota

Weather

Current Conditions(Hibbing,MN 55746)

More Weather »
79° Feels Like: 79°
Wind: NNW 10 mph Past 24 hrs - Precip: 0”
Current Radar for Zip

Today

Sunny 78°

Tonight

Clear 48°

Tomorrow

Mostly Sunny 80°

Alerts

  • 0 Severe Weather Alerts
  • 0 Cancellations

Analysis: Whither U.S. manufacturing? BEA data provides clues

General Motors assembly workers Monique Watson (L) and Evetta Osborne install an electric battery on the underside of a 2011 Chevrolet Volt
General Motors assembly workers Monique Watson (L) and Evetta Osborne install an electric battery on the underside of a 2011 Chevrolet Volt

By James B. Kelleher

CHICAGO (Reuters) - U.S. manufacturers are pumping money into domestic operations again, according to government figures. But their outlay on machines, plants and other long-term investments has not returned to pre-recession levels and has failed to translate into a significant rebound in industrial jobs.

The figures on so-called "capex" spending from the U.S. Commerce Department's Bureau of Economic Analysis offer a glimpse of the investment priorities of a sector that some argue is poised for growth after decades of contraction.

The big takeaway: Investments in automation software and other technologies that integrate production and plant scheduling with the supply chain are high on manufacturers' wish lists. New plants and equipment? Not so much.

In many ways, the data is encouraging. Investment in fixed assets by the country's goods-producers has bounced back from the depressed levels it plunged to in 2009, according to BEA. In nominal terms, capex spending by manufacturers actually set a record last year.

In 2012, the most recent year for which data is available, manufacturers poured $416.9 billion into capex investments, BEA said, up from $389.3 billion in 2011 and $352.9 billion in 2010.

It's true: In inflation-adjusted terms, last year's investment fell short of the all-time peak of $430.6 billion set in 2008 and the $427.3 billion set in 2007.

But analysts say last year's number was still impressive, especially given the depth of the pullback in spending by manufacturers and the challenges they continue to face at home and abroad.

The recession left many companies with a huge amount of idle capacity that is only now being put back to work, and the patchiness of the global recovery has given them plenty of good excuses to postpone investing.

As a result, William Strauss, a senior economist with the Federal Reserve Bank of Chicago, calls the recovery in capex spending, "fairly decent ... when you consider that growth in the U.S. economy since the recovery began has been - all in all - pretty mediocre."

BACK TO THE FUTURE?

The BEA numbers, which were released on the eve of the government shutdown and largely overlooked because of it, are likely to add fuel to the debate over the future of America's manufacturing sector.

After shedding 5.8 million jobs between 2000 and 2010 as they closed plants at home and moved production overseas, U.S. manufacturers have dramatically curtailed off-shoring in recent years.

Some, including General Motors Co , General Electric Co , United Technologies Corp , Whirlpool Corp , Apple Inc , Caterpillar Inc and Deere & Co , have even brought limited production back to the country.

That has prompted some analysts to posit the United States is on the brink of a "manufacturing renaissance" undergirded by a revolution in unconventional oil and gas exploration at home and rapidly rising labor costs in China.

Not everyone buys the argument and several closely watched measures of manufacturing's importance to the overall economy, including its share of nonfarm payrolls and its contribution to gross domestic product, continue to contract.

But several other key gauges, including output, are back near pre-recession levels, and others such as capacity utilization are getting close to their long-term averages.

BIG BET ON TECHNOLOGY

Breaking the BEA's capex numbers down even further, another intriguing detail emerges - one that suggests that this isn't your grandfather's manufacturing rebound.

Less than half the money manufacturers are investing in their U.S. operations is going into plants and equipment. The bulk is going into intellectual property (IP) and other intangibles that people looking for brick-and-mortar proof of a manufacturing renaissance might easily overlook.

That was not always the case. For decades, manufacturers spent more on equipment and plants than on IP. When manufacturers invested, those investments were easy to see because they took the form of plant and even workforce expansions.

But in 2001, the year China was admitted to the World Trade Organization, they began putting the majority of their dollars into software, a trend that has not stopped, according to BEA.

In 2012, manufacturers spent $235.3 billion on software and other intangible intellectual property and technology, compared with $158.2 billion on new equipment and just $23.3 billion on new facilities and other structures, according to BEA.

Experts say this focus on technology is good news for the sector because it increases productivity and efficiency and decreases time to market. This makes manufacturers more agile and flexible as they confront growing competition from every corner of the globe.

But the bad news - at least for anyone holding out hope that manufacturers will hire back the 2 million industrial workers laid off between 2007 and 2012 - is that the new technologies allow plants to be more productive with fewer workers.

One illustration of that productivity-employment trade-off comes from Strauss at the Chicago Fed.

"We've only recovered about 23 percent of the manufacturing jobs that were lost in the downturn, even though we've recovered 84 percent of the industrial production we lost in the recession," he says.

The reason, Strauss says, technology-driven productivity gains.

That leaves analysts inside and outside the government dubious that the long-term decline in industrial employment will reverse itself, even if output grows as forecast.

The U.S. Department's Bureau of Labor Statistics has forecast that manufacturing employment will decline between now and 2020, even though the value of the sector's output is expected to grow 2.8 percent a year and reach $5.7 trillion by then.

"We're skeptical of this idea that there will be a massive return of manufacturing jobs," says Suzanne Berger, a professor at the Massachusetts Institute of Technology and the co-chair of its Production in the Innovation Economy project.

(Editing by Andre Grenon.)

Comments