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The Great American Rebound Has Just Begun

The latest from Martin Hutchinson

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.

Here's why.

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.

>>For more from Martin on America's rebound, read The Silver Lining Buried in the "Bad" GDP Number.

>>Get a different, on-the-ground perspective with This Economic "Recovery" Doesn't Fool Struggling Americans.

>>Or read about the struggles that lie ahead for the U.S. in Latest Debt Ceiling Bill Is Nothing More Than a Band-Aid.

Join the conversation. Click here to jump to comments…

  1. rc | February 13, 2013

    Yea right. I am going to believe a study done by a bank that launders drug money. LOL

    • fallingman | February 13, 2013

      Don't forget the money they laundered for terrorists.

      But it's okay. They paid a fine. Seems the jails were full of people who tried to sell raw milk, exercise their free right to free speech in unauthorized zones, etc. We can't tolerate that crap, but banks can do ANYTHING and get away with it…and have…and are continuing to do so as we speak.

      On the substance of the article, no real disagreement, except to say that things like the disappearance of the rule of law, disregard for the sanctity of contract and private property rights, a hostile rampaging Goliath of a government, and a central banks on tilt…to name just a few super negatives…might be enough to discourage any serious wholesale efforts to repatriate manufacturing concerns. Having cheap nat gas is nice. Having a place where the rule of law operates rather than the rule of men would be a bigger plus.

      As those who are returning would attest, simple input costs aren't everything. The irony is that they seem to underestimate or not appreciate just how dysfunctional the USSA has become and how rapid the slide into the abyss is proceeding. Welcome home guys. Enjoy your cavity search and just ignore the live military exercises going on downtown. They're only firing blanks…for now.

  2. Cath | February 13, 2013

    What an uplifting article. You are a most intelligent man and I appreciate your insights.

  3. DD | February 13, 2013

    Cath – Wake up! I agree with RC on who would believe anything that comes from a bank that deals in drugs?

    How can American rebound when it prints $85 BILLION PER MONTH just to stay afloat? LOL.

    Plus the only way jobs are going to come back is when American's accept being paid on the same scale as China, but even if they did, of course the cost of living would not come down, that will still be sky high by comparison.

  4. James | February 13, 2013

    Timely article, Mr. Hutchinson.

    Your message is the same as President Obama's State of the Union Address. He proclaimed U.S.A. will regain its manufacturing base.

    Your article reinforces his statements regarding the U.S. manufacturing renaisance. U.S. corporations like Apple are returning manufacturing to the U.S. China's tightening labor market and lower energy costs resulting from shale oil and natural gas extractions are chief factors responsible for the change. Another huge factor is robotic and automation technologies which substitute machines for labor in manufacturing products.

    Old Yankee ingenuity is the answer to the U.S. morass. It is bringing us out of the desert and into the promised land. It, more than anything else, is responsible for the great American rebound!

    Former President George W. Bushs' "No Child Left Behind" and President Obama's "Race to the Top" educational programs will result in a highly educated work force focussed on science and technology. The labor market is currently undergoing a major restructuring to create a new labor pool to keep America big and strong and a world power.

    I have high hopes for America for the near future.

    However, huge problems remain unresolved. For one, Keynesian economics does not work in an irrational economic system. The "Too Big To Fail" (TBTF) bank concept is irrational. Not one mention was made in the President's address. It is a glaring ommission. Probably it is because our economy is too weak and fragile to address this issue now. It will probably have to be dealth with in a later administration when our whole global financial system collapses.

    That problem is the overhang to the great American rebound. Enjoy the rebound while it lasts.

    • fallingman | February 13, 2013

      "Former President George W. Bushs' "No Child Left Behind" and President Obama's "Race to the Top" educational programs will result in a highly educated work force focussed on science and technology."

      Tell me this is sarcasm.

      You obviously haven't taught in any of our colleges or universities. I have, and if you'd seen what I've seen, you'd be scared witless. Talk about dumbed down.

  5. Ryan | February 13, 2013

    Keep in mind many of today's manufacturing jobs require a 1/3 the work force they did just 10 years ago due to automation. With automation and cheap energy the US can and will compete with China.

  6. Michelle | February 13, 2013

    It's certainly closer to flat lining than rebounding. On 'fact checking' the state of disunion speech: Obama touted the growth of 500,000 manufacturing jobs over the past three years, but there has been a net loss of 600,000 manufacturing jobs since he took office. The recent growth also has stalled since July 2012.

    (See MSN News: "Fact-checking Obama's State of the Union," Feb. 13, 2013.)

  7. Walter Baltzley | February 13, 2013

    Unfortunately, this article does not account for advances in technology that will eliminate any potential for long-term jobs. Chemical plants are being replaced with cheaper, more efficient automated systems called "Micro Reactors" and manufacturing is being taken over by inexpensive automated robots.

    I agree that a lot of manufacturing may return to the United States, but it will hardly be the "renaissance" of job-creation touted here. Yes, there will be a huge bump in construction for a few years, and I believe there WILL be a job renaissance, but it will NOT be in traditional manufacturing.

  8. dourdan | February 13, 2013


  9. david | February 13, 2013

    yea i trust hsbc….trillion dollar money launderer for drug cartel……

  10. Malcolm Rawlingson | February 23, 2013

    Manufacturing will no doubt return to the USA. But manufacturing jobs will not. Very smart robots that can replicate all of the activities of production line workers at a cost of $20k each means that most jobs will be done by robots and not by Chinese Vietnamese or US workers. Those days are gone for ever folks. Robots do not need pay cheques, or pensions, or dinner breaks, or coffee breaks, or lunchrooms, or washrooms. They can work 24 hours a day 7 days a week. Never take holidays, never have the Monday morning blues, never take sick days, don't need healthcare plans….and the price of them is dropping rapidly. The payback time is less than one year. And yes there are even robots that repair other robots.
    The days of the manufacturing job are finished. Both here and in China. This new world is right here right now.

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