4 Lessons from the U.S. Manufacturing Revival

With little help from Washington, factory jobs are returning

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If you haven't noticed a "Made in the USA" label recently, keep your eyes open: It's on its way back.

Over the last two decades, thousands of U.S. manufacturers have set up overseas operations meant to take advantage of cheap foreign labor and permissive regulations. The offshoring trend has eliminated millions of American jobs and generated a lot of political pressure for new policies that protect the ones that are still available. President Obama has made a stronger manufacturing sector the centerpiece of his proposal for "an economy built to last."

[Photos: Obama 2012 on the Assembly Line]

With little fanfare, however, the manufacturing sector may be reviving itself, regardless of what happens in Washington.

A combination of factors is now making the United States a far more attractive place to build factories and assemble products. For one thing, wages are quickly rising in China and other overseas manufacturing hubs, narrowing the wage gap that once made those countries so appealing. At the same time, U.S. manufacturers have become extremely efficient, largely because they've had to adapt in order to remain competitive. A relatively weak U.S. dollar (sorry, Rick Perry) draws foreign firms to the United States, since it can be cheaper to build stuff here than in their home countries. And American consumers, though pinched by the recent recession, remain an economic power worth sidling up to.

The net result may be a manufacturing boom that reverses much of the outsourcing of the last 20 years. Boston Consulting Group predicts an upturn that will create two-to-three-million new jobs by 2020, add between $20 billion and $55 billion to annual economic output and bring several industries that have migrated overseas back home to America. "The tide is starting to turn," BCG analysts wrote in a recent report. "The implications are likely to be profound." Companies already planning to move overseas production back to the United States include NCR, Ford, Coleman and All-Clad, along with many smaller firms. Few economists or business leaders anticipated this imminent revival, which makes it worth plumbing for insights. Here are four lessons from manufacturing's unexpected change of fortune:

Government policies are a minor factor. The weak dollar, which is partly a byproduct of the Federal Reserve's low interest rate policy, has helped lure more foreign firms to the United States. But other than that, it's mostly market forces—not Washington policies—that are helping bring back the industrial sector. That doesn't mean Washington should sit on its hands. But it suggests that instead of trying to rebuild the economy with highly ambitious policies—which often can't get through a gauntlet of opposition in Congress anyway—Washington's efforts would bear more fruit if they complement positive trends already underway. This isn't a liberal or conservative view. Rather, it's pragmatic: First do no harm, then see if assistance from the government can check negative trends or amplify positive ones.

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Cost cutting is a major factor. And "cost cutting" means the pay and benefit reductions that have been painful for many blue-collar workers. In a recent report heralding a new "industrial revolution," Bank of America Merrill Lynch pointed out that since peaking in the 1980s, U.S. labor costs have fallen by about 50 percent, compared to costs in other developed nations. That has come from difficult concessions by unions, the rise of non-union factories, and new technology that has reduced the need for workers. Yet it has also allowed the United States to evolve from an overpriced market to a highly competitive one.

That doesn't mean pay cuts and reduced living standards are a necessity in the manufacturing sector. But it does mean that old sinecures like automatic pay raises and guaranteed minimum pay levels can hamper competitiveness, and aren't healthy in the long run.

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There's a strong upside to globalization. Stephen Gray, CEO of Gray Construction in Lexington, Kentucky, says the outlook for the next 12 to 24 months is the strongest it's been in years. One of the biggest reasons is an influx of foreign firms such as Siemens, Volkswagen and Hyundai. "I see continuing opportunity," he says. "In the construction market, we are seeing a definite trend of foreign companies locating to the United States." Data backs that up. Merrill Lynch reports that the United States is still the world's top recipient of foreign direct investment, by far. And the latest numbers show FDI in manufacturing rising by double digits.

Many Americans have bemoaned globalization, since it seemed to suck jobs out of the United States with little tangible benefit. But the same market forces have made U.S. manufacturing more efficient and set the stage for the return of sustainable, high-paying blue-collar jobs.

America's demise is greatly exaggerated. The U.S. economy, including manufacturing, still faces a lot of challenges. America's infrastructure, for instance, is old and creaky and ranks far below average, which is a competitive disadvantage. But many people underestimate the resilience of the U.S. economy, and its ability to heal itself. Sometimes it takes longer than anybody would like, but the gloom in Washington doesn't always extend to America's towns and factories. Now if only we could make Washington more productive.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success, to be published in May. Follow him on Twitter: @rickjnewman.