labour costs are rising overseas and energy costs are falling in America.
These trends have everyone excited that an American manufacturing renaissance is at hand.
Unfortunately, there is no good evidence to suggest this is happening. In fact, some data suggest the opposite is happening.
“Evidence for a structural renaissance is scant so far,” writes Goldman Sachs’ Jan Hatzius.
And even if we could bring manufacturing back, is that what we really want? When manufacturing comes back, so does pollution.
Furthermore, the idea of reindustrialization represents the end of a mega-bullish secular trend for earnings.
The idea of an American manufacturing renaissance is a nice one. But the charts we looked at suggests its actually a combination of fiction and misfortune.
US exports should be growing as a share of global exports if there were a manufacturing renaissance. This is not happening.
'The picture shows that US exporters have only tended to gain share following significant dollar depreciations. There has been no discernible change in this relationship in recent years. If anything, US export performance has tended to fall short of what one would have expected based on currency movements.'
Source: Goldman Sachs
US and euro area exports are moving together closely, suggesting no change in competitive advantage.
'...U.S. export performance looks only middling even if we restrict our attention to European trading partners. Exhibit 6 compares real export growth for the U.S. and the Euro area, stripping out intra-Euro area trade in order to avoid contamination by the weakness in Euro area domestic demand. The two series continue to track one another closely, suggesting that both are driven by the global trade cycle as opposed to structural changes on one side of the Atlantic or another.'
Source: Goldman Sachs
US manufacturing job growth has decelerated sharply, and it's actually growing much more slowly than the rest of the labour market.
But America's most energy intensive industries have been moving in line with the rest of the manufacturing sector.
'But Exhibit 7 shows that we have not yet seen a material pickup in output in the parts of the manufacturing sector that should benefit most from low natural gas prices, such as aluminium, steel, plastics, basic chemicals, and fertiliser and other agricultural products. At least so far, the benefits from the increase in U.S. energy production seem to have been confined to the direct effects on output and income.'
Source: Goldman Sachs
'Most see the prospect of America reindustrialising as bullish,' writes Gerard Minack, Morgan Stanley's Head of Global Developed Markets. 'In my view, that depends on whether you are an economist or whether you are an investor. The 'deindustrialisation' of America was bad for economic growth, but the increased global supply of labour lifted margins and total profits. The effect of wider margins on profits far outweighed the effect of two weak US GDP cycles (the cycles following the 2001 and 2008-09 recessions). Reindustrialisation may reverse this mix: Economic growth may improve, but margins worsen.'
Profit margins have been key for profit growth (see green shaded area) in recent years. That will recede.
'The reindustrialisation of America, if it occurs, will likely be bearish for US equities,' writes Minack. 'The biggest medium-term issue for equity investors is whether current high profits can be sustained. One factor boosting margins was the Asian-led surge in global labour supply, which squeezed returns to labour and boosted returns to capital. This was particularly pronounced in America. Reindustrialisation implies that this process has run its course, suggesting that returns to capital will revert to normal over the medium term.'
Source: Abby Joseph Cohen, Goldman Sachs
And before we even talk about the reindustrialization of America, we should consider the possibility that it never deindustrialized.
'America remains the world's largest manufacturer measured by value added,' notes Minack
- US manufacturing isn't growing as a share of world manufacturing.
- Energy intensive industries aren't gaining from low energy costs.
- A manufacturing renaissance would be bad for profits and stocks.
- It would also be bad for pollution.
- America never deindustrialized in the first place.
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