What’s Going Right in Manufacturing?
With the U.S. economy about to enter a record 10th year of expansion, many people ask what’s been the catalyst. One key driver should not be taken for granted: manufacturing’s revival in this country. After contracting more than 20% in the Great Recession and shedding about 2.9 million jobs, U.S. manufacturing is back. Not only has the sector added 1.4 million jobs since 2010, but the ISM’s Purchasing Manager Index has been in the growth range for 29 straight months. In Q3 of last year, manufacturers produced $2.35 trillion in value-added output, an all-time high.
So what’s going right in manufacturing? A new paper by that name provides some insights into this ascent, especially over the past two years. Written by Mark Vitner and Azhar Iqbal of the Wells Fargo Economic Group, the paper was awarded the 2019 Daniel Meckstroth Award for Research in Manufacturing by the National Association of Business Economists. (The award is named after MAPI’s long-time chief economist.)
Vitner and Iqbal have done some statistical analysis and identified a number of potential drivers of the manufacturing sector’s strong performance. Here are two that likely have had the largest impact over the past few years.
- Tax and regulatory reform. While the Tax Cut and Jobs Act reduced corporate tax rates, just as significantly it moved the U.S. tax system towards a territorial system, which makes it less advantageous to produce components overseas. But the most significant change for manufacturers over the past two years has been the slowdown in the pace of regulatory change. Some regulations enacted in late 2016 have been rolled back, and the Trump administration has significantly slowed the pace of new regulations. In President Obama’s last year in office, more than 90 “economically significant” rules were signed into law. In President Trump’s first year in office, fewer than 20 were. For a sector that has experienced an average of 1.5 new regulations a week for 40 years, this is significant, especially for smaller manufacturers.
- The shale energy boom. Perhaps nothing has played a bigger role in the resurgence of manufacturing than the shale boom. In 2018, the United States became the largest producer of both oil and natural gas. That boom has created enormous demand for a variety of products, from fabricated metals and steel pipe to drilling equipment. That’s American manufacturing’s sweet spot. As the authors say, “all that metal used by fabricators and producers of oil field equipment had to be made somewhere, which has provided a boost to the steel industry.”
The manufacturing resurgence has helped boost the U.S. economy in recent years. And that’s what’s going right in manufacturing.