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Will 2016 Be Better for US Manufacturing?

Dec. 1, 2015
As 2015 draws to a close, economists look ahead to a year where U.S. manufacturing should see improvement.

When does U.S. manufacturing break out the champagne? After losing nearly 2.3 million jobs during the Great Recession, manufacturing helped to spearhead the recovery, and talk shifted from the death of American manufacturing to a manufacturing renaissance.

In September 2012, for example, the Boston Consulting Group issued a report forecasting that domestic manufacturers, benefitting from cheap domestic natural gas prices and rising labor costs in China, would experience a manufacturing renaissance between 2015 and 2020 in which exports could rise by $130 billion annually and the U.S. would gain 2.5 million to 5 million jobs as a result.

While 2015 has been far from a disaster for U.S. manufacturers, it also has born little resemblance to the start of a massive uptick in domestic production. Just over a year ago, Manufacturers Alliance for Productivity and Innovation had predicted that manufacturing production would grow 4.0% in 2015. Instead, it is puttering along at 1.9%. And through the first 10 months of 2015, employment in U.S. manufacturing has shrunk by 1,000 compared to the start of the year.

We'll forego the chance to prognosticate about 2020 and set our sights on a closer target -- 2016. How does it look to economic forecasters?

"Yes, it is going to be better but it is not going to be gangbusters," says Daniel Meckstroth, chief economist for the MAPI Foundation, the research affiliate of MAPI. He said manufacturing production should hit 2.7% in 2016. The modest improvement will come because the U.S. won't experience next year a string of "shocks" -- a severe winter, West Coast ports strike, commodity prices falling 20% or more, and a dollar strengthening 16% -- that pummeled the manufacturing economy in 2015, Meckstroth explained.

Yes, it is going to be better but it is not going to be gangbusters.

— Daniel Meckstroth, MAPI Foundation

Chad Moutray, the chief economist for the National Association of Manufacturers, sees "more of the same" as we enter the new year -- an overall economy and manufacturing both growing but "not as fast as we would like." He expects U.S. GDP to grow 2.5% and industrial production to gain around 2.0%.

Moutray points to the strong dollar as the major brake on manufacturers, along with weakened global markets such as China and Brazil and low crude oil prices hurting the energy industry and its supply chain.

All is far from gloomy, Moutray notes. The chemical sector has experienced an investment boom because of low natural gas prices. Foreign investment continues to flow in, in part he says, because the U.S. "still looks pretty good" compared to many other economies.

Don't expect new technologies such as additive manufacturing and the Internet of Things to ignite the manufacturing sector just yet, Moutray cautions. While the U.S. is "on the cusp of some transformative changes" due to these technologies, he says manufacturers are still learning about them and figuring out how they will incorporate them in their businesses. The process is complicated, he says, because connected technologies not only transform production but lead to new data-driven service businesses.

Economist Alan Tonelson, author of the RealityChek blog, is not as sanguine about next year. He notes that the strong dollar is not only making it harder for U.S. firms to export goods but also making it tougher for them to compete in the lucrative United States market. That's because foreign firms can send products to the U.S. that are priced lower due to currency advantages.

"Price advantage can be especially important for manufacturing," says Tonelson. "The sector as a whole hasn't had a great deal of pricing power in recent decades because of global competition. Even relatively small changes in price competitiveness can have very big effects."

This export/import double whammy continues to push back against U.S. efforts to expand exports and reduce the nation's staggering trade deficit. In 2014, Tonelson points out, manufacturing set a new record with a trade deficit of $734.44 billion. Through September 2015, the nation was running 14.77% ahead of that mark. In September, Tonelson notes, the U.S. had a record monthly manufacturing trade deficit of $74.69 billion.

Those figures just reinforce the reality that for many U.S. manufacturers, the renaissance still feels more like a lengthy rebuilding project.

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