Global Economic Watch


Recent Posts



  • McKinsey Quarterly: The Next Trend in Manufacturing

    There was massive growth in "offshoring" in the years before the global economic crisis. Then some manufacturing jobs returned to the U.S. and we called it "reshoring." Are you ready for "next-shoring"? In the McKinsey Quarterly , Katy George , Sree Ramaswamy , and Lou Rassey take stock of the economics of manufacturing for today and the coming years, and they make the case for that new technologies are making labor costs less of a factor in choosing where to set up factories. More than two-thirds of global manufacturing activity takes place in industries that tend to locate close to demand. This simple fact helps explain why manufacturing output and employment have recently risen—not only in Europe and North America, but also in emerging markets, such as China—since demand bottomed out during the recession following the financial crisis of 2008. Regional demand looms large in sectors such as automobiles, machinery, food and beverages, and fabricated metals. In the United States, about 85 percent of the industrial rebound (half a million jobs since 2010) can be explained just by output growth in automobiles, machinery, and oil and gas—along with the linkages between these sectors and locally oriented suppliers of fabricated metals, rubber, and plastics (Exhibit 1).2 The automotive, machinery, and oil and gas industries consume nearly 80 percent of US metals output, for example. In China too, locally oriented manufacturers have contributed significantly to rising regional investment and employment. The country has, for example, emerged as the world’s largest market and producer for the automotive industry, and many rapidly growing manufacturing sectors there have deep ties to it. As automotive OEMs expand their capacity in emerging markets to serve regional demand, their suppliers have followed; the number of automotive-supplier plants in Asia has tripled in just the past decade. Read Next-shoring: A CEO’s guide here .
  • Understanding Increased Efficiency Through One Potato Chip Factory

    Don't confuse the below video as being about a potato chip factory. It is better to view it as a short history of manufacturing in America. The video is from Planet Money , and it provides an interesting lesson in how technology has changed business. We hear so much about manufacturing getting so much more efficient over the last half-century, it is helpful to have a clear example of how exactly that takes place for one company: Secrets From The Potato Chip Factory from Planet Money on Vimeo .
  • Brookings Paper Calls on Regional Firms to Increase Exports

    Researchers in the Brooking Institution 's Metropolitan Policy Program have put out a new paper calling on the federal government to "initiate a short-term competitive Regional Export Accelerator Challenge (REACH) grant program." They argue that too many U.S. cities are too slow to engage in the global marketplace. From the paper: Despite the size and growth of foreign consumer demand, too many firms and too many parts of the United States remain domestically-oriented, thereby missing out on opportunities to innovate and expand. In addition, the national export service delivery system is too Washington-centric and does not embrace federalism’s opportunities to work directly with leaders in regions, and their state partners, to globalize traditional economic development strategies. The key problem is that both individual firms and entire regions under-export. -Too few firms are exporting and exporting regularly. As of 2010, less than 1 percent of U.S. firms sell a product abroad, a much lower share than in other countries, including major trading partners such as Canada, Germany, and Korea. While the number of new exporting firms continues to grow (with 16,500 firms beginning to export between 2009 and 2010), that pace is slower than the creation of all new firms, keeping the overall percentage of exporting firms low. As of 2010, the United States has 293,000 exporters. However, only 188,000 firms exported in both 2009 and 2010, suggesting that approximately one-third of exporters may be “accidental exporters” that react to one-time demand from international buyers rather than integrating exports into their long-term sales and marketing strategy. -The nation itself remains a patchwork of exporting activity. The share of the U.S. economy that is driven by exports is relatively small, at 14 percent. But even at that level, 74 percent of metro areas—and 86 of the 100 largest metro economies—underperform the national rate. Metro areas as large and diverse as Atlanta, Baltimore, Denver, Miami, New York, and San Antonio all generate less than 8 percent of their economic output through exports, placing them in the bottom quarter of performers among the largest 100 metro economies. Read the paper here . Amy Liu , co-director of the Metropolitan Policy Program, discusses the need for domestic firms to expand exports in this interview:
  • Big Shift in Outsourcing and Offshoring as Wage Gap Narrows

    With the current bleak employment picture in most developed economies, few topics become more emotionally charged than outsourcing and offshoring. But following a half decade of recession and slow growth, the outsourcing may be less appealing to some major multinationals. And that makes now a key moment to explore the benefits and challenges with the practice. The Economist features a special report on outsourcing and offshoring in the latest issue of the magazine. Here's a helpful look at some of the key takeaways from the report: The Economist's Europe Business Editor Tamzin Booth explains that it is indeed the narrowing of the gap between costs in developed and emerging economies--the US and China being the most important comparison--that has turned some companies off of outsourcing. "Global labor arbitrage," is the term Booth uses. Other key reasons are advancing industrial automation, and the reality check that outsourcing didn't work out quite as well as some companies expected. Listen to Tamzin Booth discuss the special report here . Access the special report here .
  • GE's Appliance Park and a Case Study in Manufacturing Jobs Returning to the US

    Charles Fishman writes In The Atlantic , writes about General Electric moving some manufacturing operations back to the U.S. It seems a bit of a stretch to say this is part of an "Insourcing Boom," as the article is titled, but the economic conditions that have led GE to manufacturing high end refrigerators and water heaters at Appliance Park in Louisville, Kentucky are important to note. Fishman: GE’s appliance unit does $5 billion in business—and today, 55 percent of that revenue comes from products made in the United States. By the end of 2014, GE expects 75 percent of the appliance business’s revenue to come from American-made products like dishwashers, water heaters, and refrigerators, and the company expects that its sales numbers will be larger, as the housing market revives. What’s happening in factories across the U.S. is not simply a reversal of decades of outsourcing. If there was once a rush to push factories of nearly every kind offshore, their return is more careful; many things are never coming back. Levi Strauss used to have more than 60 domestic blue-jeans plants; today it contracts out work to 16 and owns none, and it’s hard to imagine mass-market clothing factories ever coming back in significant numbers—the work is too basic. Appliance Park once used its thousands of workers to make almost every part of every appliance; today, every component GE decides to make in Louisville returns home only after a careful calculation that balances quality, cost, skills, and speed. Appliance Park wants to make its own dishwasher racks, because it can, and because the rack is an important part of the dishwasher experience for customers. But Appliance Park will likely never again make its own compressors or motors, nor is it going to build a microchip-etching facility. And of course, manufacturing employment will never again be as central to the U.S. economy as it was in the 1960s and ’70s—improvements in worker productivity alone ensure that. Back in the ’60s, Appliance Park was turning out 250,000 appliances a month. The assembly lines there today are turning out almost as many—with at most one-third of the workers. Read The Insourcing Boom here.
  • Brookings Discussion on Manufacturing, Innovation, and Productivity

    We have been trying to keep up with the very robust public conversation among economists about the state of manufacturing in the US. Ever since the president made a push for increased productivity in the manufacturing sector during the State of the Union, there has been no shortage of opinions, and, thankfully, analysis of the potential for manufacturing to be a significant part of the recovery. Yesterday, the Brookings Institution held a panel discussion titled Why—and Which—Manufacturing Matters: Innovation and Production in the United States . It was a thoughtful and informative--albeit wonky--presentation. Susan Helper was one of the participants. In this excerpt, Helper, professor of economics at Case Western Reserve University, speaks to how a successful marketing strategy features coordination of investment and creates both supply and demand: Here is the full panel discussion:
  • BCG's Hal Sirkin on the Rise and Recovery of Manufacturing in the US

    Add Boston Consulting Group's Hal Sirkin to the list of industry experts who believe that reports of the death of US manufacturing have been, as Twain might put it, "an exaggeration." With the decline of the dollar and the rise of wages in China, "It's now becoming more effective to produce in the U.S. than it is to produce in a lot of different countries," says Sirkin. Sirkin recently discussed the state of manufacturing in the US with the Knowledge@Wharton editor in chief Mukul Pandya .
  • Econbrowser: Rise in Capital Good Exports, and Overall Manufacturing Output, Since 2009

    Menzie Chinn has a collection of useful charts at Econbrowser illustrating the state of manufacturing in the US. Here's one, showing "cumulative changes in real exports vis a vis 2009Q2." Chinn writes: Clearly, export growth is decelerating -- not surprising given the collapse in trade volumes that took place during the great recession. Nonetheless, I find it interesting how much capital goods exports have increased. Now, as I mentioned in an earlier post, vertical specialization means that it’s unclear how much value added is incorporated in particularly the goods exports. Still, I think there is evidence for a manufactured exports rebound. Finally, there has been substantial skepticism that manufacturing employment will rebound strongly, even if the President’s initiatives outlined in the State of the Union are implemented. [4] I think that skepticism is largely warranted, given rapid productivity growth in that sector. However, that doesn’t mean that manufacturing value added won’t necessarily rebound. BEA only released data up to 2010 last month, so one can’t be sure. So while we have seen some marked improvement in U.S. exports and a a trimming of the trade imbalance, the question remains whether we will see sustained growth, and the sort of recovery-driving rebound of the manufacturing sector that President Obama has been calling for. Read Net Exports, Exports, Real Exchange Rates and Manufacturing here .
  • Carnegie Council Slide-show Raises Key Questions About the Revival of U.S. Manufacturing Sector

    This Global Ethics Corner from the Carnegie Council does a nice job of laying out the core questions we should be asking about the bipartisan push in Washington for a revival of manufacturing in the U.S.: "Is the rebirth of America's manufacturing industry necessarily a good thing?" This, and the other questions raised in the slide-show about factories and innovation, should be good conversation starters for a class discussion on the role of manufacturing in the U.S. economy today.
  • The World Economic Forum's Future of Manufacturing Project

    Here is a new video from the World Economic Forum on the future of manufacturing. While it comes across as a bit earnest in parts, we are sharing it here because it does a nice job of explaining how manufacturing--"advanced manufacturing" in particular--drives global economic growth. What is your take? Do policymakers need to work harder to drive advanced manufacturing in their economies? Can developed economies like the US compete with the new manufacturing juggernauts like Brazil and China?
  • What Bad Manufacturing Data in China, Europe Spells for Global Economy

    Is it possible that manufacturing data in the US is running counter to the rest of the world's major economies, and it is in the US that we are seeing positive data? Well, manufacturing activity is down in China. And it is down in Europe and much of Asia as well. In this Wall Street Journal video, Dow Jones editors Nick Hastings and Martin Essex discuss the potential impact the bad manufacturing data will have on the global economy:
  • Mike Mandel: Manufacturing Recovery Looks 'Tepid'

    Michael Mandel is having a hard time believing the recent articles that suggest American manufacturing is experiencing a significant recovery. At his blog, Mandel on Innovation and Growth , he breaks down some of the more recent data: Newly-released data suggest that the manufacturing recession was deeper than previously thought, and the factory recovery has been weaker. On May 13 the Census Bureau issued revised numbers for factory shipments, incorporating the results of the 2009 Annual Survey of Manufacturers. The chart below shows the comparison between the original data and the revised data (three-month moving averages): The decline in shipments from the second quarter of 2008 to the second quarter of 2009 is now 25%, rather than 22%. And the current level of shipments in the first quarter of 2011 is now 9% below the second quarter of 2008, rather than only 5%. In other words, the new data shows that factory shipments, in dollars, are still well below their peak level. Read New Manufacturing Data Show Weaker Factory Recovery, Deeper Recession here .
  • Understanding the Recent Growth of US Manufacturing

    On his Econoblog, The Street Light , economic consultant Kash Mansori takes a look at what is behind the recent strong performance of the US manufacturing sector . He points to the production of business equipment as the primary factor: Mansori: The reason for this strong growth in the production of business equipment is something that I think has largely been overlooked: business did actually begin spending on investment goods in 2010. Much of this was simply catching up from the extreme slowdown in spending on equipment in 2008 and 2009, but nevertheless, in 2010 it was definitely true that business spending on equipment and software grew at a very healthy rate. Note that this matches my personal (i.e. anectdotal) experience over the past 12 months; senior management of the companies I meet with almost universally tell me that the purse strings have finally loosened, and their companies are beginning to make major purchases and investments that had been put off. Read What's Driving US Manufacturing Growth here . ( H/t Mark Thoma )
  • Manufacturing Sector Adds Jobs for the First Time in a Decade

    +1.2%. Not a startling figure. But as James Hagerty reports in the Wall Street Journal , that may be a pretty significant number, as it represents the growth rate of manufacturing jobs in the US for 2010. It is the first year in which the sector gained more jobs than it lost since 1997. Of course, there was a lot of room to grow after the losses during the recession, so while the positive growth is significant, it may not be time for widespread celebration. And while growth may continue, Hagerty reports, it won't be at fast rates: The economists' projections for this year-calling for a gain of about 2.5%, or 330,000 manufacturing jobs-won't come close to making up for the nearly six million lost since 1997. But manufacturing should be at least a modest contributor to total U.S. employment in the next couple of years, these economists say. After a steep slump during the recession, manufacturing is "the shining star of this recovery," says Thomas Runiewicz, an economist at IHS. He expects total U.S. manufacturing jobs this year to rise to about 12 million. Currently, manufacturing jobs account for about 9% of all U.S. nonfarm jobs; the average pay for those jobs is roughly $22 an hour, or nearly twice the average for service jobs, according to government data. Despite the upbeat forecasts, job growth may remain modest because many companies are finding ways to increase production through greater efficiency and automation, without adding many workers. In the third quarter, U.S. manufacturing productivity increased as output rose 7.1% from a year earlier and hours worked grew just 3%. Conrad Winkler, a vice president at the consulting firm Booz & Co. who focuses on manufacturing, says manufacturers are being very cautious in their hiring, partly to avoid the risk of having to lay off people later on. Read the full article here . And watch James Hagerty discuss manufacturing jobs on WSJ's News Hub:
  • Is 9-10% Unemployment the New Norm?

    Peter Cappelli , professor of Management at The Wharton School , says Americans have a tendency to accept unemployment rates as "normal" when they stay at the same level for a while. In the 90s, for example, 4% became the accepted norm. The "new normal" was 8% in 1981. And now, we may be resigning ourselves to the idea that 9-10% is normal. What is different now, Cappelli says, is there are more people who believe that "there is nothing that can be done" about high unemployment. Here is Cappelli speaking about the current debate over what to do about unemployment today in a Knowledge@Wharton interview: