Although US manufacturing is currently facing meaningful headwinds from a stronger dollar and the collapse in investment in the shale energy sector, it remains the most competitive worldwide, according to a new report released by Oxford Economics.
The report suggests the rapid and broad-based 20% U.S. dollar appreciation since mid-2014 has done some significant damage to U.S. manufacturing competitiveness. However, three factors have offset the hit from the stronger currency: the dollar was arguably the most competitive it has been before the surge; U.S. manufacturing productivity is the strongest in the world; and the US is “gifted” with a stable regulatory framework, a flexible labor market, low energy costs and access to a large domestic market, wrote Gregory Daco, head of U.S. economics, Oxford Economics, in the report.
The report makes these additional points:
Since 2003, productivity growth in the United States has outpaced most of its peers, with manufacturing output per employee rising about 40% (2.5% per annum on average) from 2003 to 2016 compared with only 25% growth in Germany and 30% growth in the UK. While productivity growth has lagged that of Japan, the U.S. manufacturing sector remains 25% more productive. Likewise, while productivity has doubled in India and China, the U.S. manufacturing sector remains 80-90% more productive.
Most advanced economies have seen similar compensation growth over the past 13 years, but stronger productivity in the United States has allowed it to maintain generally lower unit labor costs. Since wage growth in China has largely outpaced productivity growth, and the renminbi has strengthened, China’s unit labor costs are now only 4% lower than in the US.
While there is growing evidence of reshoring, especially in the most competitive and export-intensive U.S. manufacturing sectors, Mexico appears to offer a sensible “near-shoring” alternative with costs 10% lower than in China, a stable regulatory environment and generally unhindered access to the U.S. market.
In the baseline forecast, Oxford Economics sees the dollar appreciating another 3-5% through 2017 before gradually depreciating thereafter. In this environment, the U.S. manufacturing sector will maintain its edge. Another 20% appreciation of the dollar, on the other hand, would certainly dent U.S. competitiveness, and once again make China an attractive production hub, as well as giving Japanese manufacturers a significant advantage over U.S. firms.
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