Resurgence of Manufacturing

1st Quarter 2014 Hotline

Market Watch
Southern Industrial Development

by Joe A. Hollingsworth, Jr.

Many of last decade’s fantasies are today’s realities, and none more than the resurgence of American manufacturing. Article after article a decade ago said the US was destined to be the land of restaurants and retail outlets eliminating domestic manufacturing. The demise of domestic manufacturing output – and the attendant American manufacturing jobs with it – manifested itself as company after company outsource production to far away economies.

Fast forward to today when, while China, Vietnam, Thailand, and others remain competitive, the huge compounding growth of their GDP as a result of foreign manufacturing locating into the countries has dramatically raised prices. The question we ask ourselves is where manufacturing is going next as demand continues to expand with the return of growth in America.

The Boston Consulting Group’s report declared American manufacturing is back. No doubt a surprise to many, when all costs are taken in to account, a few U.S. states such as Alabama, South Carolina, and Tennessee registered the lowest cost production sites in the industrialized world for products to be sold in America.

That alone is impressive, but, in fact, there are many other states very close to that top tier. Based largely in the southeast and with right-to-work laws, the manufacturing worker, coupled with automated production systems, is the world’s most productive. Some of the other drivers of cost differentials are soaring energy and labor costs in Asian countries on top of the difficulties of managing a long supply chain.

However, more importantly, American manufacturing has worked to change in the face of its challenges. The crash of the economy forced manufacturers to chase huge productivity gains, achieving higher output values with fewer people. The harsh reality was if they did not do that the company would not exist for long. The productivity gains have led to the re-shoring or on-shoring of manufacturing jobs at a rate that hasn’t been seen for decades.

The reorganization of manufacturing around domestic production is early in its cycle. However, acceleration of the trend manifests from the awareness that domestic production is a compelling alternative. Just as important, due to the realignment and the weakening of the dollar, America goods sold overseas are getting a fresh look, too. The ISM Manufacturing Index has been in positive territory for six months now, indicating month-to-month expansion, and November was the best reading in 30 months. The reading for new orders and export orders were are highs for the year.

The media is always mesmerized by the headline GDP growth, but, for us in industrial real estate, the growth of certain components of GDP are far more important. As the United States continues to gain competitiveness in manufacturing – due, in large part, to the hyper-productive American manufacturing worker – it’s the growing manufacturing component and factory utilization rates that put the “butter on our bread”.

“Joe Hollingsworth participated as one of our first equity investors. In addition, Joe Hollingsworth has served as a board member and leading advisor for strategic planning and direction.” — Scott Kelley, President and CEO, Service Center Metals