Morgan Stanley just published a massive report entitled “U.S. Manufacturing Renaissance: Is It A Masterpiece Or A (Head) Fake?”
Adam Parker, Morgan Stanley’s Chief U.S. Equity Strategist, pointed to an interesting chart: capacity utilization, or the amount of manufacturing production that is being done versus what could be done.
His basic argument is that capacity utilization is still low. So while we could see some manufacturing come back to the U.S., we shouldn’t expect a big boost in employment or capital expenditures. Rather, our existing capacity will just absorb it.
Here are Parker’s comments:
Many C-level executives, economists, and investors have been mentioning for some time that one of the keys to a US economic recovery is capital spending. If a chunk of the over $1.5 trillion dollars in cash on US companies’ balance sheets can be confidently spent on factories that employ American workers than make stuff the world needs, that would be an unbridled incremental positive relative to the last couple of years. Yet, when we look across the biggest US companies, we see evidence that a big surge in capital spending is unlikely in the current environment and that an industrial “renaissance” could be more muted than many expect. Why?
Manufacturing Capacity Utilization
Manufacturing capacity utilization has risen sharply since the last recession but is still below both the long-term average and the highs of previous expansions. In fact, 15 out of 22 manufacturing industries have capacity utilization today below their long-term average. Recent economic data have begun to moderate, and to us, it is far from obvious that material capital spending is required or even likely in the near term.
And here’s the chart:
Yes, it’s recovered since the recession, but the trend is still very much downward.
Looks closer to (head) fake.