There are two big emerging economic stories coming out of the U.S.
There’s the American energy boom, which will be driven by drillers tapping American shale.
And there’s the American manufacturing renaissance, which is supposed to be driven by rising overseas labour costs and falling domestic energy costs (thanks to the energy boom).
But so far, there’s little evidence to suggest the manufacturing renaissance is underway.
Goldman Sachs’ economist Jan Hatzius recently argued that if we were experiencing a manufacturing comeback fuelled by cheap energy, then we’d see energy intensive industries outperform in its sector. But it’s not. Here’s Hatzius’ chart:
Part of the reason for this may be the fact that energy costs are actually very small relative to every other cost in manufacturing.
Deutsche Banks’ Peter Hooper makes this point in a new research note:
Manufacturing to benefit, but energy is relatively small input. There is scope for the industrial sector to benefit from lower natural gas prices, as oil still has about a 50% share of energy use in that sector, down from 55% in 2006. And there has been a lot of discussion recently about the possible boom in US manufacturing in response to lower energy prices caused by the shale revolution. Anecdotally, there have been reports of plants relocating to the US to take advantage of lower energy costs. We would expect the most energy- intensive manufacturing industries to benefit most from the shale energy revolution, including petroleum and coal, chemical, paper, and printing, among other industries (Chart 17). However, given that energy products account for a relatively small share of total output in these industries, we would express some caution about forecasting a US manufacturing revolution based on lower energy prices alone. Deciding on a plant location is a complex decision that considers not only input costs but the location of demand as well. While US manufacturing will surely benefit from rising global labour costs and lower energy prices, the relatively low energy intensity of a number of manufacturing industries suggests that the shale energy revolution may have a more muted impact on the overall US economy.
Here’s Hooper’s chart: