The U.S. manufacturing renaissance is not just a fantasy – it is actually happening. Jobs that had been outsourced to China and elsewhere really are returning to the United States.
Believe it or not, this "reshoring" already has reversed the long, steady decline of manufacturing jobs in the U.S.
In fact, since 2010 America has added roughly 500,000 manufacturing jobs, an increase of 4.3%.
The economic and investment implications of this reversal are considerable to say the least.
With the disadvantages to manufacturing overseas growing each year, it's no wonder reshoring is beginning to become a major trend.
One of the drivers is cost-especially as it relates to "cheap Chinese labor." As it turns out it's not that cheap anymore.
Three Keys to a Manufacturing Resurgence
According to an HSBC study quoted in the Financial Times, real wages in China's coastal areas have risen 350% in the last 11 years. Demographics are only accelerating the trend toward higher wages.
Last year, China's working age population fell for the first time, by 3.5 million to 937.5 million.
That means the endless supply of young workers from farms in China's rural areas is drying up, pushing China's wages up even further. Already, the country's balance of payments surplus has disappeared, and China's manufacturing costs, adjusted for productivity, have increased from 20% of U.S. costs to some 50%.
That still gives China an advantage in direct labor costs, but the additional costs of international sourcing must also be considered. When transportation, duties, supply chain risks, and other costs are fully accounted for, the cost savings of manufacturing in China begins to diminish.
In any case, unless there's a major downturn in China, its overall competitiveness is likely to continue to decrease.
Of course, the more excitable commentators like to claim that China's cost increases alone will push manufacturing back to the U.S. But the truth is that's nonsense.
There are many other low-wage emerging market countries with decent political and economic stability, all of which have had their competitiveness enhanced by the same Internet and mobile telephony that has pushed Chinese outsourcing ahead.
As such it only follows that the return to U.S. manufacturing from rising Chinese costs alone would be modest.
But there's another factor involved here – and this one is home grown.
The second thing bringing manufacturing back to the U.S. is the rise of fracking techniques for the immense U.S. shale gas deposits. That's different than the oil shale fracking which is unlikely to affect U.S. competitiveness much, because oil can be transported fairly readily (though in the short term excess production from Canadian tar sands has made oil much cheaper there).
However, gas is expensive to transport without an infrastructure of pipelines, which don't exist in most places. With the arrival of shale gas fracking, the United States now has a substantial energy cost advantage for applications which can efficiently use gas to supply energy for local plants–especially those near these shale gas formations.
Finally, in the long run a third U.S. cost advantage may reappear. It is the cost of capital.
With the world's most advanced and developed capital markets, the U.S. has traditionally had the lowest cost of capital- combining the lowest cost of debt with the greatest ease of raising equity for medium-sized companies.
Unfortunately, Alan Greenspan and Ben Bernanke have lost this U.S advantage. By making money easy to get at cheap rates, they have driven the banking system and international investors to invest in emerging markets, lowering their cost of capital artificially.
Whereas previously their cheap labor was offset by expensive capital, today their labor is still cheap, while their capital is also a little more expensive than in the U.S. For instance, when the near-bankrupt, impoverished socialist Bolivia can borrow $1 billion for 10 years at less than 5%, the U.S. capital cost advantage has effectively disappeared.
Of course, with some countries it's not coming back.
China has $3 trillion in foreign reserves and a very high savings rate. Under those circumstances it's going to get all the capital it needs at a cheap price.
But lesser countries, like Vietnam, India and most of Africa, will find capital expensive again once U.S. monetary policy has stopped creating money artificially. That will increase the cost advantage of U.S. manufacturing, at least in some cases.
Of course, who knows when Bernankeism will finally end. My guess is that a crisis will precipitate a return to sanity, but of course emerging markets will suffer in that crisis, as they did in 2008.
How to Invest in the Manufacturing Renaissance
To judge where to put a factory in the U.S. and get the best cost advantage, you need to look at where the gas is, and also where the workforce is abundant.
North Dakota, for example, is unlikely to get a big influx of factories from the Bakken shale. There are barely enough people there to get the gas itself out, and the boom has pushed the unemployment rate down to 4% and brought a massive housing shortage.
Meanwhile, Pennsylvania (and parts of New York and Ohio) have the gigantic Marcellus shale and lots of unemployed workers. However in these states there's another problem: Heavy unionization and no right-to-work laws which makes labor expensive and potentially recalcitrant. My guess is, these states will benefit less than they should from shale gas manufacturing.
The best bets are places like Michigan, where there is the substantial Antrim shale, but also a new right-to-work law, reducing the power of the unions and making labor potentially cheaper.
With high unemployment and good manufacturing capabilities, Michigan could see major manufacturing investments in coming years. Similarly Texas has gas, a steady supply of workers, a right-to-work law and a favorable business climate; it should benefit accordingly.
As for individual companies, it's worth researching in detail, bearing in mind that a modest return to U.S. manufacturing won't benefit General Electric (NYSE:GE) much, for example, because of its size.
However, you might look at the big chemical companies like Dow Chemical (NYSE:DOW) (based in Midland, MI) which recently split from the National Association of Manufacturers because of the latter's support for natural gas exports.
That's because the chemical business by its nature is gas intensive. Obviously for companies like DOW, if the gas can't be exported, it becomes cheaper here in the U.S.
You might also look at Irving,Texas-based Fluor Corp. (NYSE: FLR) , which will get a large chunk of any business building chemical plants and its share of industrial construction in general.
The great American rebound has just begun.