Friday, April 12, 2013

Why are manufacturing companies in the USA doing well these days.

I recently posted on the continuing growth in U.S. manufacturing GDP which is increasingly accompanied by a decrease in manufacturing jobs and the switch in employment from manufacturing to services.

Tonight I saw an episode of Need to Know on how Ohio workers are dealing with the loss of manufacturing jobs and the loss of a middle class standard of living for the manufacturing factory workers who are able to keep working.

The program pointed out that U.S. manufacturing companies have been doing quite well for several years. Interest rates are essentially negative (lower than the rate of inflation), so that companies can borrow and invest in automation. The United States has also developed new technology (fracking) to produce natural gas and has a good pipeline infrastructure to distribute the gas, resulting in much lower energy costs for factories than are available in other countries. (It is costly to export U.S. natural gas to China, so we continue to enjoy the low resource cost.) U.S. factory wages and benefits have been deteriorating, but they remain much higher than those in developing nations.

The United States continues to have a huge market for manufactured goods, and of course the transportation costs of getting U.S. manufactured products to U.S. consumers are lower than those of foreign countries selling into the U.S. market.

A few thousand U.S. companies own 80 percent of manufacturing capacity in this country. All are multinational, and they have learned to shield profits from taxation. For example, they transfer ownership of intellectual property to countries with low tax rates on industry, and then charge U,S, factories for use of the patents, transferring funds that would be U.S. profits taxed at high rates to the foreign subsidiaries. Many hundreds of millions of dollars are being held in these foreign subsidiaries.

U.S. companies are therefore competing for U.S. market share in part by using cheap money to automate and replace labor, by using cheap energy, and by paying low taxes. They are also benefiting from the increase in labor costs in China as that country becomes more affluent (and begins to see increase in worker income as necessary to create domestic demand, which in turn is needed to maintain China's high rate of economic growth).

Check out this article on the Obama plan to continue growth in U.S. manufacturing. And this article on the reduction of international financial flows (which suggests to me that there is less credit available in developing nations for them to invest in capital improvements for their factories than there was before the 2008 financial crisis.)

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