Hollidaysburg, Pa. — Don't tell Michael W. McLanahan that manufacturing in the United States is dead. His family-owned, privately held company has made mineral processing and farm equipment since its founding way back in 1835 — and is enjoying a boom.
“It was our best year ever,” said McLanahan, during a tour of the busy factory in central Pennsylvania that illustrates why manufacturing is growing twice as fast as the broader economy.
McLanahan, 73, is the fifth generation of his family to run the capital-intensive company. It builds equipment to help mining companies separate product from waste, the dairy industry to remove manure from sand and the energy sector to segregate gravel from silica sand used in fracking — the process of drilling through shale deposits thousands of feet below ground to reach natural gas.
McLanahan Corp. boomed even as U.S. economy struggled to gain momentum in 2011 and the global economy was panicked and fearful that Europe's debt problems would drag everyone down. One important reason for McLanahan's success — and for U.S. manufacturing's rising luster — is an export revival.
McLanahan Corp. is no outlier. The manufacturing sector as a whole bounced back in 2011, adding more than 287,000 new positions over the past 13 months and shifting into higher gear after a summer slowdown brought on by Europe fears.
During 2011, exports of U.S. goods and services were up by 14.5 percent over 2010, to a record $2.1 trillion, the Commerce Department reported Friday. And despite Europe's economic problems, U.S. exports to Europe rose 3.6 percent in December.
In the 1990s, as environmental regulation stiffened on the U.S. mining industry, McLanahan refocused the company to take advantage of export opportunities. Back then, about 10 percent of the company's product went overseas. Today it's about 70 percent.
Mineral-rich Australia is a big customer, and McLanahan has benefited greatly from that country's high labor costs and weaker manufacturing base.
“We can build here and ship into Australia for cheaper than they can make it there,” said McLanahan. He laments that mining in the United States has shrunk so much and with it, domestic sales opportunities. “I knew that the future of our company depended on a robust export effort.”
During a recent visit, the Pennsylvania manufacturer was busily filling orders from Iceland and Colombia, as well as actively building log washers for the timber industry and equipment for dairy farmers. It recently installed equipment in Glen Rose, Texas, to prepare fracking sand for shipment. Natural gas drillers in Pennsylvania are consuming so much silica sand, he said, that the price now varies between $240 a ton to $400 a ton, compared to $10 a ton for sand used in concrete mix.
Other data also signal a nationwide manufacturing rebound. December orders for durable goods — big-ticket items such as cars, refrigerators and industrial equipment — rose by a better-than-expected 3 percent. That was on top of November's upward revision to a 4.7 percent increase.
Similarly, Federal Reserve data for December show manufacturing output rose nine-tenths of a percentage point. For the final three months of 2011, industrial production rose at an annualized rate of 3.1 percent, the 10th straight quarter of growth.
It's good news for a sector that accounts for about 12 percent of the U.S. economy but lost more than 6 million jobs over the past decade. There's even anecdotal evidence that some companies that had shifted production overseas are beginning to come home, a process known as in-sourcing or re-shoring. Some orders for iron castings that McLanahan had lost to China are returning because of quality and supply issues.
How many firms are moving back? It's hard to know.
“It's a hard number to quantify — the notion of out-sourcing and in-sourcing. There's a hype to both of those numbers,” said Chad Moutray, chief economist for the National Association of Manufacturers. “We have a lot of foreign companies that are locating here. It's a global decision-making process right now.”
Right now many factors are combining to make American manufacturing more attractive than it's been in quite a while. These include rising production costs in China, flat wage growth in the United States, corporate borrowing rates near historic lows, a weakening of the dollar against the currencies of competitors in hot emerging economies and a boom in U.S. natural gas production that's lowering a key cost for U.S. factories.
“Labor cost is not the only factor that is under consideration when you are locating. Taxes, energy costs, the advantage of being closer to the customer,” said Moutray. “A sea-change in our thinking, at least globally, is that the U.S. is now on the map when it comes to these decisions.”
Not everyone buys the trend.
“I think it feels better than it is. The data itself looks to be very seriously flawed, and although dead-cat bounce is too strong a term, there is a kernel of truth in it,” said Alan Tonelson, a research fellow at the U.S. Business and Industry Council, which represents smaller U.S. manufacturers who do not operate abroad.
Tonelson points to a widening deficit in manufactured goods, noting that even as exports grow, ground is being lost to foreign competitors. A USBIC study released Feb. 7 found that Chinese exporters had captured 7.5 percent of American purchases of 108 different capital-intensive segments of U.S. high-tech manufacturing in 2010.
“It is very difficult to see how the manufacturing sector could be excelling as it is losing market share in its own backyard,” said Tonelson, author of the book 'Race to the Bottom.'
Daniel Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation, an industry research group, sees conditions for sustained improvement for U.S. manufacturers.
“The exchange rate is 20 percent lower if you look at the broader trade-weighted dollar, cheapest natural gas prices in the world, modest compensation increases, unit labor costs declining over the five years,” he said. “You could expect that in a current decision, firms would be more likely to purchase domestic than from a foreign supplier. That's, I think, the good news.”
A less-discussed factor in the rebound of American manufacturing is last year's horrific earthquake and tsunami in Japan, and devastating flooding in Thailand later in the year. The two natural disasters forced multinational corporations to rethink how they purchase parts from across the globe.
“The bigger issue is do you want long supply chains now,” said Meckstroth, pointing to the auto sector that normally gets shipments twice a day to allow for production in 12-hour cycles. The process is called just-in-time manufacturing. While popular over the past decade, it is now less so, since natural disasters exposed the weaknesses in holding skimpy inventory.
“You can't afford a ship not getting there, being delayed. The ideal situation is to have a factory closer to your supplier,” he said.
While good numbers of late point to improvement in demand for U.S. manufactured goods, there've also been significant gains in productivity, or the per-hour output of U.S. workers. It increased by an average of about 4 percent annually during the past decade, and reached a 5 percent increase from June to September last year. For durable goods, manufacturing productivity was up 9 percent.
Put simply, manufacturers are doing a lot more with fewer workers. This helps explain why the bounce-back of manufacturing employment is less than it appears, partly because it comes off a very steep decline. The U.S. economy contracted by about 5 percent during the Great Recession, but had recovered the lost terrain by last September.
“Manufacturing has only half-recovered, it's 56 percent recovered,” said Meckstroth, noting that his sector fell 20 percent and has recovered about 11 percentage points. “It has to grow another 9 percent to get back to where it was before the recession.”
Economists at MAPI don't expect the sector to fully recover until 2014.