This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, in a specially commissioned piece for Morningstar's US Investing Week, T. Rowe Price discusses the re-industrialisation of America.
American jobs have slowly moved overseas over the last few decades, as companies took advantage of major labour cost advantages to export manufacturing to the expanding emerging market economies.
Much of the ‘American Dream’ was built on manufacturing excellence – with factories constructing everything from heavy machinery and auto parts, to household appliances and other consumer items.
The majority of American consumption today is in foreign-made goods, with the service-based sectors picking up the slack of reduced manufacturing jobs.
However, American manufacturing is currently in the midst of a renaissance, with companies reversing the trend of offshoring and US goods become more competitive in global markets.
There are many key drivers of this change – including a surge in domestic energy production, technology gains, and restrained labour costs. The ‘onshoring’ trend from Asia and elsewhere to the U.S. and Mexico is also accelerating.
The US lost four million manufacturing jobs between 1990 and 2007 due to outsourcing, which resulted in a decrease in manufacturing as a percentage of GDP. In 2009, the number of US manufacturing jobs troughed at 11 million, as businesses streamlined and reduced capacity to cut costs during the recession. Since then the US has added one million manufacturing jobs, according to the most recent 2012 data, showing that growth is happening slowly.
Many of the strongest drivers of manufacturing growth are new domestic energy production techniques, which have helped US suppliers produce natural gas at a low cost relative to other countries. The US energy revival should not be underestimated. The revolution in hydraulic fracturing and horizontal drilling is creating a boom in shale oil and gas production and new opportunities for both established leaders and newcomers with attractive assets.
Not many people realise the US is now the third-largest producer of oil and natural gas liquids in the world. In terms of just oil, the US will pass Saudi Arabia within two years, and a year or two after this the US will pass Russia to be the largest. These developments are especially meaningful for US chemical processing plants that can use natural gas to produce by-products, which can be sold on a global market with a higher cost structure.
The US also maintains the most productive work force in the world as a result of capital and advances in automation, and low-wage inflation. These trends have improved U.S. competitiveness and prompted foreign auto manufacturers to expand their US footprint.
Many companies are either directly or indirectly benefiting from the increase in US manufacturing, including companies in the transportation and energy services industries.
A recent survey of 100 shippers – representing $20bn in transport spend – highlighted this shift in emphasis back towards the US. The survey looked to ascertain what change in production sourcing companies expect over the next five years. The overwhelming majority of respondents expect less from China and more from North America.
However, while an uptick in US manufacturing will undoubtedly create additional jobs, it will not solve the country’s current unemployment problem – largely due to improvements in automation technology. In addition to this, until burdensome tax regulatory policies are resolved, many companies may be unwilling to meaningfully expand their manufacturing operations.
