Reshoring, FDI Trends Add U.S. Manufacturing Jobs

U.S. manufacturing continued to grow in December, but much more slowly than in previous months, according to the Institute for Supply Management. Headwinds included a strong U.S. dollar; trade disputes; dysfunction in Washington, DC, and higher interest rates. Tailwinds included the strength in reshored manufacturing jobs for the last several years.

For example, manufacturing jobs via reshoring by U.S. companies and through foreign direct investment (FDI) grew to 171,000 in 2017, the fastest rate in history. That’s up 50 percent from 2016 and 2,800 percent from 2010, according to the Reshoring Initiative. Since hiring lags reshoring announcements by about two years, the impact of 2017 is still being felt.

The Reshoring Initiative, which tracks this data, said 576,000 jobs have returned from offshore since 2010. That flow played a key role in keeping manufacturing growing in December, said Harry Moser, founder and president of the Reshoring Initiative, adding “2017 was a great year for reshoring. We could have even stronger years if Congress would act more aggressively on a skilled workforce, a lower dollar and a value-added tax (VAT).”

In 2017, businesses benefited from corporate tax and regulatory cuts following the 2016 election. Like the previous few years, FDI continued to exceed reshoring in terms of total jobs added, but reshoring has closed most of the gap since 2015.

Source: Reshoring Initiative

Reshoring data from 2018 won’t be quite as rosy. The Reshoring Initiative estimates 131,000 jobs were added. “Why the decline?” said Moser: “The U.S. dollar is going up; there’s dysfunction in Washington; and there are ongoing trade disputes. Regardless of where you sit on tariffs their impact on some manufacturing sectors has been negative.” The aluminum and steel user sector has been hurt, said Moser, while the aluminum and steel producers and the appliance industry have prospered.

U.S. companies realize they can remain competitive if they remain onshore, Moser said. “Companies are becoming familiar with a broad range of factors, costs and risks, they had previously ignored. Understanding the reasons other companies have given for reshoring helps companies to determine whether those reasons apply to them also,” he said.

Businesses have also had negative experiences offshore, the Reshoring Initiative reported. Most of the issues are related to distance — freight, delivery and inventory. Others are country specific, such as rising wages, IP risk and political instability. Companies have consistently reported positive domestic factors more often, probably because the companies place more value on demonstrating the wisdom of their current reshoring decision than on what went wrong with their earlier offshoring decision.

Progress is relative

Progress is, however, relative, the Reshoring Initiative pointed out. Reshoring and imports both increased strongly in 2017. In 2015, parity was reached between offshoring (calculated from any increase in imports) and returning jobs, indicating that the net bleeding of manufacturing jobs had stopped. In 2016, for the first time since 1970, the U.S. reshored more jobs than it lost to offshoring. The U.S. had gone from losing net about 220,000 manufacturing jobs per year at the beginning of the last decade to adding net 30,000 jobs in 2016.

While 2017 shows an even larger increase in reshoring job announcements, the U.S. also saw a simultaneous large increase in non-petroleum goods imports, up $91 billion from 2016. A large increase is typical for years when the U.S. economy is strong, but this change was nine times the increase from 2015 to 2016.

A booming U.S. economy in 2017 drew in more imports, according to the Reshoring Initiative. Additionally, the dollar was down slightly in 2017, increasing the cost of imported goods. Finally, appliance and solar panel imports accelerated in the fourth quarter in anticipation of higher tariffs.

Additional highlights from the 2017 reshoring report:

Proximity to customers remained the leading factor driving reshoring and FDI in 2017, followed by image/branding: Made in USA, government incentives, and ecosystem synergies.
For the first time, Asia surpassed Western Europe in generating jobs by FDI, due mostly to increased investment by China and continued strong showings by Japan and Korea.
The Southeast and Texas remain the top regions for reshoring and FDI, with the Midwest gaining ground in second place due to its strong industrial base.
Transportation equipment remained the strongest industry, accounting for nearly 36 percent of total jobs returned. Apparel and medical equipment saw the largest increases in industry ranking.
Reshoring has been increasing at a similar rate as FDI, indicating that U.S. headquartered companies are starting to understand the benefit of U.S. production that foreign companies have seen for the last few years.

Data for 2018 is likely to show more headwinds — hiring associated with regulatory and tax reductions has slowed. The U.S. dollar strengthened in 2018, making U.S. goods more expensive in foreign markets. And uncertainty over tariffs has many companies holding off on capital expenditures.

There are also tailwinds that are likely to encourage more reshoring:

Continued increases in usage of total cost of ownership instead of price in making sourcing decisions.
Continued reductions in regulations.
Environmental consciousness. Domestic supply chains are more transparent than offshore and less polluting, cutting the world’s environmental impact by up to 50 percent, depending on the product.
Sustainability will continue to increase as a corporate strategy and will help drive reshoring and FDI.

“With 3 million to 4 million manufacturing jobs still offshore, as measured by our $500 billion/year trade deficit, there is potential for much more growth,” Moser concluded. “We call on the administration and Congress to enact policy changes to make the United States competitive again.”

Complete data for 2018 will be released in the spring.