By Bobby Eubank, Thematic Research Analyst
Originally posted on TheHill.com 10/10/17
The Institute for Supply Management’s (ISM) production index increased to 62.2 in recently released data for September, a month marked by notable and unfortunate hurricane activity. This reading is nearing the highs of this economic expansion.
The overall Purchase Manager’s Index (PMI) from the ISM which includes production but also factors such as employment, inventories, backlogs and inflation was reported at 60.8, the highest reading in more than 13 years.
Enabling Secular Growth
Despite below-average economic growth and recurring geopolitical uncertainty, manufacturers here in the U.S. are reporting brisk business. However, with manufacturing gains for 100 consecutive months, many are asking when this business cycle will end.
Instead of focusing on when the cycle will end, which it eventually will, it is important to ask how to make America’s manufacturing base better positioned for secular growth.
The U.S. won’t become the lowest-labor-cost country for manufacturing, and that’s okay. By embracing automation and training our labor force, we can still become a low-cost producer.
Highly productive manufacturing is necessary for the U.S. to become a more competitive exporter but also able to better serve its $13 trillion domestic consumer economy. Several major apparel brands have announced initiatives to start automated production here in the U.S.
Without automation, these plans would never make it to the CFO’s desk given our labor costs relative to developing countries. For now, these initiatives are limited in scope but may begin to attract creative designers and talented engineers to the space.
The word automation is often associated with job loss. While job displacement by definition happens with increased automation, the U.S. has a unique opportunity to create a large and well-paid workforce that harnesses the power of automation.
Currently, the U.S. lacks the trained labor force to program and implement automation across our factories and warehouses. None of the major robotics companies are based in the U.S.
However, the U.S. is a leader in the hardware and software that enable Artificial Intelligence (AI) which is on the cusp of adoption in factories and warehouses around the world. This technology can allow robots to learn on their own how to best perform a task and then share that method with other robots.
AI will drastically reduce the high costs of programming automation equipment and free those programmers from the tedious task of integrating machinery and allow them to work on higher value problems.
One area that continues to see strong job growth despite automation is warehouses. Our consumer economy is going through a paradigm change where goods are being delivered from warehouses rather than being carried home from a store.
Amazon, despite rapidly increasing its robotics usage, announced in July that it was looking to hire an additional 50,000 people for its fulfillment centers and also announced plans for a second headquarters with 50,000 jobs, each paying over $100,000.
This is in addition to its already massive employee base, including those programming robots and researching artificial intelligence.
Artificial Intelligence Arms Race
From manufacturing to retail merchandising algorithms, AI offers great benefits to numerous industries. Companies worldwide are seeking to catch up to American companies’ head start.
Stifling the adoption of automation and AI during this key phase would harm rather than help America’s ability to grow a talented workforce capable of solving the challenging problems of the future.
Bobby Eubank, CFA, is an equity research analyst for Chevy Chase Trust, which provides investment advisory and corporate fiduciary services.