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Blue collar towns across America could see a pickup in business in the next few years.
A report from Boston Consulting Group says the U.S. economy is on cusp of a manufacturing boom as global companies "reshore" their production facilities to take advantage of the country's flexible labour market and low energy costs.
Harold Sirkin, senior partner at Boston Consulting Group and author of the report, tells BNN that the past decade that saw manufacturing jobs sent overseas to low-cost countries such as China is about to become a thing of the past.
"The world changed in 2001 when China entered the World Trade Organization and they were entering with wages of 58 cents US an hour and at 58 cents an hour it was almost a no brainer for companies to start to outsource to China," he says. "But what's happened over the last 11 years is wages have been rising 15 to 20 percent a year [in China] and that spread that companies were getting -- which used to be around 30 percent -- is now getting closer to around 10 percent of total costs."
He says that 10 percent spread -- which measures the discount in manufacturing costs between the U.S. and China -- makes offshoring "almost not worth it."
"If you're 7,000 miles way from the place you want to sell and you have to worry about increasing wages going on in the future, [and] there are quality issues with things made in China -- these are all things that start to say at about 10 percent difference companies will start to reshore to the United States," he says.
Sirkin adds that it won't simply be companies based developing nations that look to relocate their manufacturing facilities to the U.S., but also companies based in developed economies.
"We're seeing a lot of companies investing in the U.S. because it's now become pretty much the low cost developed world country," he says.
In a report detailing the findings, Sirkin predicts that U.S. labour costs will be between 20 to 25 percent cheaper than other major developed manufacturing economies by 2015. Those lower costs will contribute to the growth in U.S. manufacturing, which already accounts for nearly 10 percent of GDP – its highest level in 50 years.
He says the U.S. will be able to capture anywhere from 2 to 7 percent of exports from those economies, which includes Germany, Japan, Italy, UK and France, and increase its global exports by 3 percent.
And Sirkin says this bodes well for the U.S. labour market, which has been stuck with an unemployment rate higher than 8 percent since the financial crisis sideswiped the economy. He estimates that the reshoring of manufacturing could create between 2.5 and 5 million jobs by the end of the decade and lower the unemployment rate by 2 to 3 percent.
While worker productivity and lower labour costs make the U.S. attractive to manufacturing, Sirkin says companies will also benefit from the recent surge in the production of natural gas in the U.S. as it provides a cheap and plentiful source of energy. He estimates that natural gas prices in other manufacturing economies around the world are 2 to 3.5 times higher than in the U.S., while electricity prices are 1.6 to 3.7 times higher.