Update June 4, 2012:

The Chicago Fed Midwest Manufacturing Index provides additional evidence of the manufacturing rebound and a nice summary of the report is provided at Michigan economist Mark Perry’s blog.

Original Post:

Last year may well mark the beginning of a welcome, several-year expansion in the manufacturing sector. This manufacturing expansion has driven a good portion of the improving jobs picture across the Midwest¹ over the past year. In 2011, manufacturers in the Midwest added over 113,000 jobs. In the same year, more than 63 separate manufacturing industries expanded employment, of which more than 30 added 1,000 or more jobs. Food-oriented manufacturers in the Midwest fared better than national counterparts, expanding employment over the past five years despite the Great Recession. A premier site selection group, Biggins Lacy Shapiro & Company, and Moody’s Analytics have found that the Midwest has improved cost competitiveness compared to the rest of the U.S., according to a recent Wall Street Journal article.² Overall, Midwest manufacturers seemed to be turning a corner and positioned for further expansion.

Source: JobsEQ®

Top 30 Fastest Job Creating Manufacturing Sectors:

Source: JobsEQ®

Several regional, national, and international trends give reasons for cautious optimism that 2011 is a harbinger of good years to come. International trends include rising labor costs in China as well as rising standards of living in several developing economies. The rising labor costs in China coupled with steady and impressive productivity gains in the United States are increasingly tilting the balance in favor of expanding manufacturing operations domestically rather than abroad. In fact, the Boston Consulting Group has recently found that more than a third of large manufacturers are considering “reshoring” from China to the U.S.³ Additionally, as George Mason economist Tyler Cowen points out in a recent article, as many developing economies become richer (e.g. China, India, Brazil, Mexico, and Indonesia), their wealthier consumers will want to purchase more high-end manufactured items, products more in-line with U.S. export specialties.⁴

Energy prices are a key input in the manufacturing process and cheap natural gas as a result of the shale deposits in Ohio, Pennsylvania, North Dakota, and elsewhere in the Midwest and South have ushered in a period of low natural gas prices. These low natural gas prices will likely persist for several years to come and have already resulted in low-cost, natural gas based electricity production, which provides a significant tailwind for U.S. manufacturers⁵. These low natural gas prices particularly benefit the relatively energy-intense industrial chemical and fertilizer sectors. It is quite likely that many U.S. manufacturers have not yet fully realized the long-run opportunities that are possible under the prospect of several years, if not a decade or more, of low natural gas prices.

The reemergence of a strong manufacturing sector across the Midwest creates an acute need for several skilled positions. Skilled positions are especially in demand since today’s manufacturers have leveraged technology and process improvements to increase productivity and raise quality standards so that a larger percentage of today’s remaining U.S. manufacturers can be thought of as “advanced manufacturers,” utilizing highly skilled workers and automated fabricating techniques. The skilled positions that are likely to be needed in increasing numbers during this time include mechanical repair technicians, CNC machinists, and welders. In addition to the occupations that will grow outright, there are number of positions that will require hiring to replace the numerous pending retirements in the Midwest’s aging manufacturing workforce. These positions include entry-level assemblers and laborers, but also machinists, quality inspectors, and first-line supervisors.

Ten Occupations with the Largest Forecast Growth in Midwest Manufacturing, 2011 - 2021

Source: JobsEQ®

Six Occupations with the Largest Forecast Replacement Demand in Midwest Manufacturing, 2011 - 2021

Source: JobsEQ®

Already we have seen some strong gains in 2011 in several core manufacturing positions. The Midwest has added an estimated 13,600 assembly jobs last year, close to 8,000 basic machining jobs, and more than 4,000 welders. Several skilled occupations grew faster than average; for instance, CNC machinists and tool and die positions both grew more than 6% during the past year.

Top 12 Largest Production Occupation Gains, Midwest, 2010-2011

Source: JobsEQ®

The education providers in the Midwest will also need to adjust to the needs of the expanding manufacturing industry and its increasing utilization of highly skilled machinists, robotic technicians, and other skilled trades. Regional technical-vocational training centers and community colleges may need to ramp-up and update (both in curriculum and technology) their related training programs, which have in many cases dwindled and languished over the past decade in response to lackluster demand. Equally important is to ensure that the pipeline of K-12 students receive adequate science, technology, engineering, and math (STEM) fundamentals and to encourage students to consider a career in the advanced manufacturing industry. Many manufacturers are already strained to find a sufficient number of these highly skilled positions in order to expand operations and meet growing orders.

This revival, however, is predicated on the continued success of manufacturers to control costs and increase productivity as well as for the U.S. economy to avoid potential obstacles to its recovery. These risks include a prolonged downturn in Europe, weak growth in Asia, and a strengthening dollar that reduces our export competitiveness. While these risks are present, they have not yet significantly damaged the U.S. economy, which has continued to slowly but steadily grow. Meanwhile, the Midwest can build on its strong manufacturing legacy, reap the rewards of natural gas reserves, and leverage its education system to realize the benefits of a budding manufacturing renaissance.