US Manufacturing Reaches Strategic Inflection Point 

Although it's hardly time to break out the champagne and strike up the band, the fact that the manufacturing sector in the US is showing a mild resurgence is certainly an occasion for modest celebration.

One of the indicators was posted by the Institute for Supply Management (ISM) in August. In its July 2011 Manufacturing ISM Report on Business, the Institute says that economic activity expanded in July for the 24^th consecutive month, according to a poll of the nation's supply executives.

(By the way, both the ISM and the report have legs — the Institute was founded in 1915 and, except for a four-year timeout during World War II, has issued this report since 1931.)

One key indicator is the Purchasing Managers Index (PMI). According to Investopedia, the PMI, which is issued by ISM, is "An indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment." Each month an ISM survey of more than 400 purchasing mangers from around the country asks participants to rate these factors as either "better," "same," or "worse." A scale of zero to 100 is used; a PMI reading of 50 indicates that an equal number of respondents reported "better" and "worse" conditions.

According to Bradley J. Holcomb, the Institute's chair, the PMI for July registered 50.9 percent, a decrease of 4.4 percentage points from the previous month, but still indicating an expansion in the manufacturing sector for 24 consecutive months. Production and employment also showed continued growth in July. The report notes that a PMI in excess of 42.5 percent over a period of time generally indicates an expansion of the overall economy — a rate that was achieved over the past 26 months.

Here's the ISM's rundown on the individual industries. The 10 industries reporting growth, listed in order, include: paper products; furniture and related products; computer and electronic products; transportation equipment; wood products; petroleum and coal products; printing and related support activities; primary metals; fabricated metal products; and nonmetallic mineral products. The seven industries reporting contraction in July, also listed in order, are: apparel, leather and allied products; plastics and rubber products; textile mills; electrical equipment, appliances and components; food, beverage and tobacco products; machinery; and chemical products.

Some Good News, Some Bad News

According to a report The 8th Edition of The Facts About Modern Manufacturing — produced in partnership by the Manufacturing Institute, the Manufacturing Alliance/MAPI, and the Manufacturing Extension Partnership/National Institute of Standards and Technology — the US manufacturing sector is in fairly good shape. However, storm clouds are gathering around what the report calls "an industry in transition."

The upbeat portion of the report states that manufacturing has kept pace with the seven-fold increase in the GDP since 1947, and the US continues to have the largest manufacturing sector in the world. Manufacturing is responsible for one in six private sector jobs, and productivity is higher than in any other sector of the economy. It also plays a major role in driving innovation and technology and bolstering our competitiveness in the world marketplace. Fifty-seven percent of all US exports are in manufactured goods, and since 2000, US companies, led by capital goods firms, have increased their overseas sales by 65 percent. And that's just some of the good news that underscores the importance of manufacturing to the US economy.

However, there are some major problems facing the sector, which has given rise to the many government and private initiatives that we have been covering in the Digital Manufacturing Report.

The US share of global exports has been declining despite the rise in value of its exports, with the ascendancy of China as the leading exporter of manufactured goods. We are losing market share to European and Asian competitors in the booming Asian market.

Our enormous trade deficit in manufactured goods rose from $319 billion in 2000 to $500 billion in 2007, dropping back marginally in 2008 to $459 billion due to the recession. As the report states, "A sustained deficit at these levels means several million less manufacturing jobs than would be achieved with a balanced trade picture."

We are losing out competitively in the realm of corporate tax rates. Other countries are lowering theirs; according to the report the US corporate tax rate has remained unchanged for the past two decades. Andrew Liveris, CEO of Dow Chemical and author of Make it in America, points out in his book that, "When a multinational corporation is deciding where to locate a new plant, one of the things that any competent CEO has to consider is the cost of doing business in America. Tax rates are a big part of that calculus. When U.S. rates are uncompetitive, plants get shut down in Ohio and reopened in Brazil."

As we move toward next year's presidential elections, jobs have taken center stage in the intense political jousting that is underway. Manufacturing is being touted as one of the leading forces for revitalizing the economy and driving down unemployment, especially given the multiplier effect — manufacturing more than any other sector creates jobs outside its own sector.

The Manufacturing Institute Report states flatly, "The United States is also not keeping pace with global competitors in the development of human capital or skills needed to maintain leadership in the global economy."

Quest for Jobs

So can we look to manufacturing to create more jobs in an economy where the unemployment rate is hovering around 9.2 percent?

Last May, Mike Rowe, the creator and host of the Discovery Channel's "Dirty Jobs," testified before the Senate Committee on Commerce, Science and Transportation. He said that there are 200,000 vacant manufacturing jobs that are not being filled because of a lack of workers who have the level of skill needed to handle today's manufacturing processes. (It's worth watching the video of his testimony just to hear Rowe talk about his relationship with his grandfather, who, for most of his life, "woke up clean and came home dirty." His grandfather was also a highly-skilled electrician.)

The nature of manufacturing work has changed and with it the job requirements. Marc Levinson, Section Research Manager, Congressional Research Service, has written a succinct report for use by the 112^th Congress, which has introduced hundreds of bills aimed at bolstering the manufacturing sector.

In the summary section of the report, Job Creation in the Manufacturing Revival, Levinson says, "Implicit in many of these bills is the assumption that the manufacturing sector is uniquely able to provide well-paid employment for workers who have not pursued advanced education."

But that is no longer the case. Fewer manufacturing workers are "getting dirty" in the physical production process and more moving into professional and managerial work. The introduction of automation and other advanced manufacturing techniques requires levels of learning beyond a high school education.

Levinson directs Congressional attention to several policy issues directly impacting the many bills intended to revitalize manufacturing and, in the process, create jobs including employment opportunities for less educated workers.

Realizing these goals may be difficult, he says. The reasons:

• Companies prefer to use US facilities for highly capital-intensive production.

• Not only are there fewer of them, but the manufacturing jobs becoming available requiring workers with higher levels of education and training.

• Plants with more than 1,000 workers are becoming a rarity. Federal policies that encourage the creation of new manufacturing facilities in the US will result in limited job creation.

• New manufacturing facilities are relatively unimportant as drivers of employment. Better to support existing facilities through favorable policy implementations.

For another take on this problem and some interesting solutions, read HR expert Gerry Ledford's current blog at http://www.digitalmanufacturingreport.com/dmr/2011-08-22/addressing_the_digital_manufacturing_labor_shortage.html.

Andy Grove, one of Intel's founders and former CEO, wrote in his book, Only the Paranoid Survive, "A strategic inflection point is a time in the life of a business when its fundamentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end."

The US manufacturing sector seems to have hit a strategic inflection point. Are we at the dawn of a new beginning, or the beginning of the end? The next few years may well tell the tale.