The Survivors of the Famine

This week The Economist takes on something that I've highlighted recently: the relatively good perfomance of the US manufacturing sector.

Rustbelt recovery

Against all the odds, American factories are coming back to life. Thank the rest of the world for that

ACME INDUSTRIES is a small contract manufacturer with only ten big customers. But those customers are a cross-section of the industrial economy, spanning mining, oil, transport and construction. Right now, Acme’s order book is bulging. “Everyone is up across the board,” says Bob Clifford, the company’s head of sales and marketing.

...For the first time in many years, American manufacturing is doing better than the rest of the economy. Manufacturing output tumbled 15% over the course of the recession, from December 2007 to the end of June 2009. Since then it has recovered two-thirds of that drop; production is now just 5% below its peak level.

As I've said before, I happen to think that this is more than just the cyclical recovery of a badly battered industry. (Though it is certainly that.) The fact that manufacturing output and employment has been leading this recovery, rather than lagging it as is typically the case, suggests that we may have reached a sort of inflection point - the dramatic offshoring and shrinkage of the US manufacturing sector of the past 25 years may be coming to an end.

One analogy that I like is to compare factories in the US over the past 25 years with people living in Europe in the 19th century. Attractive new possibilities, and the chance to make great fortunes, provided a strong incentive to migrate overseas. And so there was a steady flow of migration drawn on by the chance for a better life in another country.

Simultaneously, though, there are plagues and famines that happen from time to time. Think of these as recessions in our analogy. These plagues and famines periodically wipe out wide swaths of the population, and also provide many people who haven't yet been killed by them a newly urgent reason to migrate overseas, as they figure it may be their best chance of survival.

We've been through three such famines over the past 25 years (1990-92, 2001-02, and 2008-09), and each one resulted in a substantial fall in US manufacturing output and employment. But those factories that are now left in the US - the survivors - are hardy, strong, and will clearly not easily be swept away. Furthermore, the incentives for companies to migrate their manufacturing operations overseas is finally diminishing, both because the attractiveness of moving operations to another country is not as great as it used to be, and because those factories that are now left in the US apparently have a very good reason to be there (for example to be close to customers).

I don't think there will be a complete halt to offshoring, of course. Companies will continue to move pieces of their operations around the globe as market conditions dictate. But I do think that the dramatic trend of the past generation of massive amounts of US manufacturing being moved to other countries is coming to an end. Those factories that are now left in the US are the stubborn survivors, and most of them are not about to pick up and leave at this point.