U.S. Manufacturing Making a Comeback

BY MERRILL MATTHEWS

Here’s a news flash: The death of U.S. manufacturing has been greatly exaggerated. In fact, manufacturing has been growing stronger thanks to the U.S. energy boom and a steady supply of inexpensive natural gas.

And Texas seems to be leading the comeback. Forbes magazine ranks Houston as the No. 1 city for manufacturing jobs, while San Antonio comes in at No. 4.

According to a Pew Charitable Trusts report, skilled trades positions are the most difficult to fill by U.S. employers. As many as 600,000 manufacturing jobs were vacant in 2011 because employers couldn’t find the skilled workers to fill them, including machinists, distributors, technicians and industrial engineers.

Even more good news: The average salary for these manufacturing jobs is $77,500. U.S. manufacturing had been on the decline for years, in part because of:

1. Uncompetitive high tax rates and regulatory burdens,

2. The U.S. transition from an industrial economy to a knowledge economy

3. Cheap labor in many developing countries

4. High energy costs.

The first two points are still true, and the third is being reconsidered because wages in developing countries are rising.

But until recently, few understood the economic implications of the fourth factor: a widely available, inexpensive energy source brought about by innovative techniques such as horizontal drilling and hydraulic fracture stimulation (i.e., “fracking”).

U.S. manufacturers are increasingly turning to low-cost natural gas as their primary energy source, an environmentally friendly development since burning natural gas releases about half the carbon as coal. In addition, the petrochemical industry uses ethane and other liquids derived from natural gas as a key ingredient in plastics, steel and other products.

The availability of those ingredients has spurred a resurgence in certain types of manufacturing. For example, the American Chemistry Council recently estimated there are some 125 projects to expand chemical capacity in the U.S., adding $84 billion to the economy.

But it’s not just American companies investing in U.S. manufacturing; foreign investment is also growing. Taiwan’s Formosa Plastics, Canada’s Methanex, Germany’s Siemens and France’s Vallourec reportedly plan to pump billions of dollars into creating or expanding U.S. plant capacity.

As the French news agency Agence France-Presse reported last year, “The U.S. petrochemical industry, in trouble just a few years ago, is making a spectacular comeback thanks to the boom in shale gas, shaking up the industry worldwide and spreading some discomfort through Asia and Europe.”

One of those countries feeling a little discomfort is Russia because so many Asian and European nations depend on high-priced and politically conditioned Russian natural gas.

To those with concerns about whether the U.S. is in the midst of an energy bubble, the key to ensuring the energy boom is a long-term phenomenon is by adopting policies that give natural gas companies the economic incentives to produce.

One of those necessary conditions is to open up drilling on federal lands and offshore. Most drilling takes place on private or state-owned land; but the federal government owns 28 percent of U.S. land, including 62 percent of Alaska and 47 percent of 11 coterminous western states, where much of the oil and natural gas deposits reside. The federal government also controls offshore drilling, such as in the Gulf of Mexico.

President Barack Obama needs to instruct his administration to fast-track approval of proposals to drill in these areas and reduce burdensome and time-consuming environmental reviews.

The other necessary condition is to approve liquefied natural gas export permits. Federal law prohibits the export of natural gas or crude oil without government permission. The Department of Energy has approved only seven applications for permits from companies eager to build LNG terminals in order to export natural gas. But there are more than triple that number still waiting for approval.

These companies are proposing to spend in the billions of dollars creating LNG export terminals. Incidentally, refining is part of the manufacturing sector, so approving the applications will directly boost U.S. manufacturing numbers.

It’s basic economics: if you want to keep prices low, keep supplies high. And the best way to do that is to approve more drilling sites and open up markets.

Many economists and policy makers had written off U.S. manufacturing as a 19th- and 20th-century relic that couldn’t survive in a knowledge economy. But becoming an energy-producing powerhouse once again may be just the spark that manufacturing needed.

Merrill Matthews is a resident scholar at the Institute for Policy Innovation in Dallas