Making Manufacturing Great Again Would Add $530 Billion…

Making Manufacturing Great Again Would Add $530 Billion…

Nov 28, 2017

“Making Manufacturing Great Again Would Add $530 Billion to GDP”

By Andrew Soergel, Economy Reporter, U.S. News 

A new report suggests investments in today’s manufacturing operations could carry hundreds of billions of dollars in economic payoffs.

The U.S. manufacturing sector has weathered a bumpy road over the course of the past two decades – but successfully righting the country’s industrial ship would mean an economic windfall of $530 billion, according to a new report from The McKinsey Global Institute.

McKinsey put out a lengthy report last week profiling the past several years of U.S. manufacturing malaise – noting that only a few sectors, like “pharmaceuticals, electronics and aerospace” have emerged relatively unscathed.

“Some industries staged a modest demand-driven recovery between 2010 and 2015. But growth in overall U.S. manufacturing output has been slowing for two decades, with little net increase during the most recent decade,” the report said. “Today there are roughly 25 percent fewer U.S. manufacturing firms and plants than there were in 1997, reflecting not only closures but also fewer manufacturing startups. Along the way, the sector has shed roughly one-third of its jobs.”

The sector’s decline has been bad news for America’s international standing, as “low-cost contract manufacturers in locations such as Mexico, China, Vietnam and Bangladesh” gained market share. It’s also contributed to an erosion of the U.S. middle class, eaten away at economic growth and – along with a rise in automation – contributed to significant job losses. There were more than 5 million fewer manufacturing workers in the U.S. last month than there were 20 years prior in October 1997, according to the Bureau of Labor Statistics.

Smaller manufacturers, in particular, have suffered, while larger operations have in many cases managed to navigate the complicated international industrial waters.

“Many Americans long for a return to the glory days of the 1960s and ’70s, when manufacturing jobs were the bedrock of the middle class and the United States led the world in industrial output,” the study said, in some ways reminiscent of President Donald Trump’s call to restore manufacturing’s prominent role in the economy.

The report makes no reference to Trump or his call for a manufacturing renaissance. But like the president, the study’s authors are optimistic about what a revived manufacturing sector would mean for the U.S. economy. Noting that nominal economic value added through American manufacturing totaled $2.2 trillion in 2015 – which dwarfs the entire economies of countries like Brazil, Canada, Italy, South Korea and Russia – the McKinsey report suggests the U.S. economy would boom under the right policy and private sector decisions.

By utilizing new and technologically advanced design tools, adding greater emphasis to digital and online capabilities, offering more customization rather than focusing simply on mass production, and further embracing factory streamlining and automation, the report suggests manufacturing’s footprint on the U.S. economy could expand 20 percent by 2025. Providing more resources to smaller manufacturers and implementing nationwide advanced manufacturing skills training programs were also cited as necessary for propelling industrial production forward.

If all of those items are checked off the to-do list and manufacturers enjoy a 20 percent boost, that means industrial production would add $3 trillion to growth in 2025 – $530 billion more than if American manufacturers simply stayed the course and didn’t make any adjustments. That would likely also mean more jobs, stronger corporate profits and, hopefully, higher wages for workers.

“The manufacturing sector needs new capabilities and investment, and more firms need to participate in exports in order to bring the benefits of global trade to more U.S. workers,” Sree Ramaswamy, a partner at the McKinsey Global Institute, said in a statement accompanying the report. “Aging plants and equipment, especially in the supply chains of advanced industries, will have to be upgraded for digital readiness. The sector needs new digital and technical skills from its workforce, and U.S.-based manufacturers need to be as attractive to high-caliber talent as their foreign competitors.”

That advancement wouldn’t come free, however. McKinsey’s researchers recommend expanding apprenticeship opportunities in a move similar to what Labor Secretary Alexander Acosta announced earlier this year. McKinsey estimates a national apprenticeship program serving 1 million workers would cost roughly $40 billion but greatly advance American workers’ employability and skill sets.

It also suggests general equipment upgrades and new machinery will be needed to reach the country’s full potential, meaning expenses of roughly $115 billion over the next decade – though the report’s authors note that public and private investment would both go a long way.

“Revitalizing the entire sector will require dramatically scaling up what works – and the task is too big for any single entity,” Katy George, a senior partner at McKinsey & Co. and managing partner at the company’s mid-Atlantic office, said in a statement last week. “Manufacturing needs supportive government programs and policies with long-term certainty and funding. It also needs regional coalitions with everyone at the table: large and small manufacturers, workers, technology experts, educators, public officials, and investors.”

To the White House’s credit, a manufacturing council was established earlier this year to give industrial experts a louder voice in Washington – though its meetings were reported to be few and far between and it was eventually disbanded following Trump’s response to racially charged violence at a rally in Charlottesville, Virginia.

Aspects of administration-backed tax overhaul legislation currently being debated in the Senate – which would, among other things, lower tax burdens on businesses and include language that would allow employers to write off equipment expenses as tax deductible – have been touted as being pro-manufacturing. But McKinsey’s report stopped short of outright endorsing any specific policy move or proposal backed by the Trump administration.

The document does, however, repeatedly stress the importance of trade for manufacturing’s overall growth. Its authors bemoan the country’s trade deficit but stop short of advocating for a complete overhaul of or withdrawal from existing trade deals – something the Trump administration has already done in the case of the Trans-Pacific Partnership and threatens to do with the North American Free Trade Agreement.

The export markets necessary to increase America’s industrial standing could be thrown into jeopardy should Trump’s actions spark retaliatory responses abroad. Driving greater foreign direct investment is also considered to be crucial to get industrial output back on track and ultimately fulfill the president’s goal of making American manufacturing great again.

“Some individual state and local governments are already making a substantial push for more overseas investment,” the report said. “The federal government can play a bigger role in facilitating these matches and directing investment where it is most needed, as investment promotion agencies do in other countries around the world.”

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