What is insourcing?
After decades of watching American companies take jobs to other countries, we're beginning to see entrepreneurs and manufactures make the decision to keep factories and production facilities here in the United States—or even bring jobs back to the U.S. from overseas.
How do we know this is happening?
For the past 22 months, the private sector has been hiring—to the tune of 3.2 million jobs. In 2011 alone, we saw private companies bring on almost 2 million new workers, more than in any year since 2005.
That's good news, even if we still have a lot of ground to make up. And if you dive into the numbers (like those compiled in this new White House report), you'll notice something interesting:
- Business investment is up, growing by 18 percent since the end of 2009;
- We're exporting more goods and services to the rest of the world. As of October, American exports totaled $2 trillion -- an increase of almost 32 percent above the level in 2009; and
- Perhaps most importantly, the manufacturing sector is recovering faster than the rest of the economy. Through the course of the past two years, the economy has added 334,000 manufacturing job, and that's the strongest two-year period of manufacturing growth since the 1990s.
Each of those facts is evidence of a growing trend of insourcing.
What does insourcing look like?
In addition to the broad trends, we’ve seen a slew of concrete examples of insourcing.
In recent months, large manufacturers like Ford and Caterpillar have announced large investments in U.S. facilities. In years past, these sorts of expansions have been aimed at facilities in Mexico, China, or Japan.
We’ve seen the same thing with smaller manufacturers.
In 2010, KEEN, the footwear designer, opened a 15,000-square-foot facility to manufacture boots in Portland, Oregon—moving production from China to a location just five miles from its corporate headquarters. The company also makes bags in California and socks in North Carolina. After watching costs rise in its Chinese factories, Master Lock began bringing production back to Milwaukee—the same place where the company was founded in 1921.
And it’s not just manufacturers. Service firms ranging from customer support centers to software developers to engineers are deciding to invest in the U.S. for their operations. Even foreign-domiciled firms are making the decision to take advantage of American productivity and innovation. Siemens, for example, spends nearly $50 million each year training its U.S. workforce, and ThyssenKrupp spent nearly $5 billion on its new steel and stainless steel manufacturing and processing plant in Alabama. Investments from companies like these reached $228 billion in 2010, an increase from $153 billion in 2009.
What’s causing it?
The cost of manufacturing in the U.S. is improving in relation to other countries.
We know labor costs are lower in places like China, but in many cases, costs in those countries are going up. At the same time, American workers, who have always been more productive than those in other countries, are becoming even more efficient.In the first quarter of 2009 alone, productivity rose nearly 13 percent.
According to the Bureau of Labor Statistics, between 2002 and 2010, only one of 19 other industrialized countries managed to improve its unit labor cost position in manufacturing more than the United States.
Manufacturers based in the U.S. have also been able to take advantage of a boom in domestic energy production. We’ve seen a surge in American natural gas production, which has lowered energy costs, reduced pollution, and driven investment in the industries that supply equipment to the natural gas sector and those that use natural gas to fuel production—all of which have helped firms make the decision to keep jobs in the U.S.
American service firms are taking advantage of new global markets.
As economies in other nations grow, there’s more demand for U.S. engineers, software developers, researchers, and consultants. At the same time, a range of barriers that once made it hard to market those services across borders have come down. As a result, the United States is poised to expand its trade surplus in services to $146 billion in 2010. Since 2003, that surplus has nearly tripled.
What can we do to encourage it?
If we want to encourage insourcing, there are four things the federal government needs to do:
- Create incentives for businesses to invest in hiring and expanding;
- Ensure that U.S. businesses seeking to expand globally have access to new markets;
- Guarantee that American workers are the mostly highly-educated and best-trained in the world; and
- Provide the financial and technical support necessary for companies to grow and expand.
The goal of today’s insourcing forum at the White House is to begin the discussion necessary to accomplish all four of those goals.
In the coming weeks, President Obama will put forward new tax proposals to reward companies that choose to invest or bring back jobs to the United States and to eliminate tax advantages for companies moving jobs overseas.
To learn more about things that President Obama has already proposed to support insourcing, check out the fact sheet.
Or, join the conversation on Twitter. Folks are tweeting about insourcing using #insourcing.
This is In Real Terms, a column analyzing the week in economic news. Comments? Criticisms? Ideas for future columns? Email me or drop a note in the comments.
A plea to presidential candidates: Stop talking about bringing manufacturing jobs back from China. In fact, talk a lot less about manufacturing, period.
It’s understandable that voters are angry about trade. The U.S. has lost more than 4.5 million manufacturing jobs since NAFTA took effect in 1994. And as Eduardo Porter wrote this week, there’s mounting evidence that U.S. trade policy, particularly with China, has caused lasting harm to many American workers. But rather than play to that anger, candidates ought to be talking about ways to ensure that the service sector can fill manufacturing’s former role as a provider of dependable, decent-paying jobs.
Here’s the problem: Whether or not those manufacturing jobs could have been saved, they aren’t coming back, at least not most of them. How do we know? Because in recent years, factories have been coming back, but the jobs haven’t. Because of rising wages in China, the need for shorter supply chains and other factors, a small but growing group of companies are shifting production back to the U.S. But the factories they build here are heavily automated, employing a small fraction of the workers they would have a generation ago.
Look at the chart below: Since the recession ended in 2009, manufacturing output — the value of all the goods that U.S. factories produce, adjusted for inflation — has risen by more than 20 percent, because of a combination of “reshoring” and increased domestic demand. But manufacturing employment is up just 5 percent. And much of that job growth represents a rebound from the recession, not a sustainable trend. (The Washington Post’s Abha Bhattarai had a great story this week on what the much-touted “manufacturing renaissance” really looks like through the eyes of one Georgia town.)
None of that, though, stops Donald Trump from promising at every debate and campaign stop to “take our jobs back from China and all these other countries.” Nor does it stop the other candidates from visiting factories in Southern and Midwestern towns and promising — albeit in less grandiose terms — to restore the lost luster of American manufacturing. “I’m tired of seeing them creating jobs all over the world while they’re laying off American workers,” Bernie Sanders told a crowd in Youngstown, Ohio, last weekend. “Not acceptable. That is going to end.”
There’s no mystery why candidates love to focus on manufacturing and trade. The U.S. economy faces deep structural challenges — stagnant wages, rising inequality, falling employment rates among men and other groups — and China presents an easy scapegoat. (Wall Street often plays a similar role, especially on the Democratic side.) And manufacturing in particular embodies something that seems to be disappearing in today’s economy: jobs with decent pay and benefits available to workers without a college degree. The average factory worker earns more than $25 an hour before overtime; the typical retail worker makes less than $18 an hour.
But those factory photo ops ignore an important reality: In 1994 there were 3.5 million more Americans working in manufacturing than in retail. Today, those numbers have almost exactly reversed, and the gap is widening. More than 80 percent of all private jobs are now in the service sector.
There is nothing wrong with politicians’ trying to save what remains of U.S. manufacturing, nor with trying to avoid repeating old mistakes on trade. But like it or not, the U.S. is now a service-based economy. It’s time candidates started talking about making that economy work for workers, rather than pining for one that’s never coming back.
Justified or not, railing against NAFTA seems to be popular, at least among a vocal segment of the Democratic base. So it was a bit odd that when the Progressive Policy Institute this week released a new policy agenda aimed explicitly at countering Bernie Sanders’s populist message, one of the key proposals was the liberalization of trade policy.
PPI is a centrist Democratic think tank that, while not formally affiliated with the Clinton campaign, is effectively an organ of the party establishment; it bills itself as “the original ‘idea mill’ for President Bill Clinton’s New Democrats.” Its new report was widely interpreted as a bid by centrists to show they could compete with Sanders on big economic ideas.
So what were those big ideas? In addition to free trade (including ratifying the Trans-Pacific Partnership, which Sanders and now Clinton oppose), there was a grab bag of fairly familiar progressive policies: infrastructure spending, paid family leave, improved workforce training. The handful of bolder proposals seemed unlikely to inspire popular passion: Rather than make college free as Sanders wants to, for example, PPI would encourage colleges to offer cheaper three-year degrees. PPI also wants less regulation, lower corporate tax rates and a shift away from taxing income and toward taxing spending. None of those proposals are necessarily bad as economic policy, but in a year of insurgency they seem like strange politics.
Pretty much everyone who pays attention to the Federal Reserve knew that Janet Yellen & Co. wouldn’t raise rates at its meeting on Wednesday, and sure enough, they didn’t. Instead, all the drama surrounding this week’s meeting concerned how many times the Fed will raise rates the rest of the year. Back in December, the last time rates rose, Fed policymakers hinted the answer would be four. After a rocky start to the year, many economists thought the number had fallen to three. On Wednesday, policymakers indicated that if the economy stays on its current path, they will raise rates only twice.
For Fed watchers, all of this is very important and controversial, as evidenced by the investment-research emails I received within three minutes of each other calling the Fed’s decision “bowing to the obvious” (Steve Blitz, ITG Investment Research) and “wishful thinking” (Ian Shepherdson, Pantheon Macroeconomics). For everyone else, what really matters is this: Fed policymakers now think the economy will grow a bit more slowly this year and next than they did in January, and they think inflation will be a bit lower. (Separate data released Wednesday showed consumer prices fell in February, but only because of tumbling oil prices.) But they still think the economy is on solid footing, despite the slowdown in other parts of the world.
Number of the week
Oil prices are tumbling, energy companies are shutting down rigs and laying off workers, and the unemployment rate in once-booming North Dakota soared to … 2.8 percent in January. That was a statistically insignificant tenth of a point higher than in December, but North Dakota retained the nation’s lowest unemployment rate (now tied with South Dakota) for the 90th consecutive month (that’s seven and a half years).
What gives? Partly it’s that the drilling slowdown will take a while to ripple through the local economy. But another likely factor is that people who lose their jobs aren’t sticking around. During the boom, thousands of workers moved to the North Dakota oil patch, often living in temporary “man camps” because of insufficient housing. Now the man camps are emptying out. According to the Bureau of Labor Statistics, employment in North Dakota is down by 3,300 in the past year, but unemployment is up by only 300.
John Brownlee remembers Gillis Lundgren, the Swede who designed Ikea’s logo, its Billy bookcase and, most important, the flat-pack strategy that was instrumental in its global success. Lundgren died in February at 86.
Amanda Chicago Lewis looks at how African-Americans, who disproportionately suffered from the war on drugs, are being shut out of the legal-weed boom.
Ben Leubsdorf summarizes new research from economist Danny Yagan that finds that half of the U.S. could suffer a “lost decade of depressed employment.”
More on trade from Noah Smith, Paul Krugman and Adam Ozimek.