Goldman Sachs: Sorry, U.S. manufacturing isn’t coming back

March 25, 2013

One of the hottest trend stories in recent years has been the idea that U.S. manufacturing is on the verge of a large, permanent comeback. Labor costs in China are rising, while U.S. energy costs are dropping. So, the logic goes, companies will return home. Charles Fishman dubbed it "The Insourcing Boom."


Call it a comeback, sure. But a renaissance? Eh... (Ty Wright/BLOOMBERG)

The only problem? This boom hasn't really shown up in the data — at least not yet. Yes, U.S. manufacturing has expanded and added jobs since 2009 as the sector recovers from the recession. But that appears to be a cyclical bounce-back and not any sort of long-term shift.

At least, that's Jan Hatzius's conclusion in a new research note for Goldman Sachs. "Evidence for a structural renaissance is scant so far," he writes.

Sam Ro digs out a bunch of charts from Hatzius's note over at Business Insider. This first one shows that U.S. exports — a good proxy for manufacturing strength — have risen modestly in response to a falling U.S. dollar since 2009, as expected, but that's about it. There's nothing to suggest a sustained structural improvement beyond that:

Meanwhile, Hatzius isn't very impressed by the oft-repeated notion that America's newfound glut of cheap natural gas will give U.S. manufacturers an edge.

"Exhibit 7 shows that we have not yet seen a material pickup in output in the parts of the manufacturing sector that should benefit most from low natural gas prices, such as aluminum, steel, plastics, basic chemicals, and fertilizer and other agricultural products," he writes. "At least so far, the benefits from the increase in U.S. energy production seem to have been confined to the direct effects on output and income."

That second chart shouldn't come as too much of a surprise to Wonkblog readers. We've been skeptical before of the notion that the shale-gas boom will revive huge swaths of U.S. manufacturing. The reason? Energy costs are still a small factor for the vast majority of companies. A 2009 paper (pdf) by Joseph Aldy and William Pizer found that “only one tenth of U.S. manufacturing involved energy costs exceeding five percent of the total value of shipments.”

Now, granted, there are a few areas where cheap natural gas could make a big difference. U.S. petrochemical manufacturers—particularly America's $40 billion ethylene industry—should benefit greatly from cheap feedstock. And the manufacturers of pipelines and hydraulic fracturing equipment for gas and oil drilling are expected to expand in the coming years, creating an estimated 50,000 new manufacturing jobs by 2020.

But those are still rather small sectors in the grand scheme of things. And that helps explain why Hatzius, for one, isn't expecting a revolution. Yes, U.S. manufacturing will make a decent comeback in the years ahead as the overall economy continues to improve. But, he writes, that will mostly be a cyclical rebound, not a long-term renaissance.

Further reading:

--This chart will change how you think about U.S. manufacturing.

--Will cheap shale gas revive U.S. manufacturing? Not so fast.

--As manufacturing bounces back from recession, unions are left behind.

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Evan Soltas | March 25, 2013