U.S. Manufacturing – The Unsung Hero

Posted in: Economics, General, Stock Market, Thought of the Week

The U.S. trade deficit has been a topic of much discussion over the past two decades given the potentially negative ramifications of maintaining a deficit for too long. A trade deficit occurs when a country imports more than it exports, and several market pundits and economists believe that an economy can be negatively affected if a deficit persists for too long. At this moment, exports are at their highest point in 50 years and companies like Ford and NCR have begun to reverse the four decade long migration of outsourcing jobs to low-cost economies. Our Investment Committee believes that this trend of bringing manufacturing back to the U.S. is just the beginning, and if this trend does continue, then the implications are critical for long-term investors.

The reason the U.S. is bringing back jobs to the U.S. is because we have become one of the lowest-cost countries for manufacturing in the developed world. There are four components that make up our growing cost advantage:

  • The labor market in the U.S. is currently more attractive than that of all other major export economies. In addition, U.S. regulations allow greater flexibility for companies to adjust their workforce size in response to business conditions.
  • Rapid technological advances in extracting natural gas and oil have unlocked vast amounts of energy that could make the U.S. energy independent within the next decade.
  • Cheap natural gas will also contribute to lower electricity costs as more gas-fired plants produce our nation’s electricity. Energy intensive industries such as metals and paper will continue to benefit.
  • Since the U.S. has been a net importer for so long, freight costs leaving the U.S. are at very low levels. These low rates provide a material cost advantage for companies producing goods here in the U.S. to be shipped elsewhere.

The U.S. now has a distinct cost advantage compared with other developed export economies, and lower costs not only benefit companies located here but also entice even more global organizations to move facilities and operations to the U.S.

The Boston Consulting Group (BCG) recently estimated that higher exports, combined with production work likely “reshored” back from China, could create 2.5 to 5 million American factory and service jobs. Jobs are so important to our economy because as more Americans achieve steady employment, they become more confident and ultimately spend more money. The bottom line is that an economy fueled by cost advantages, rising employment, and a reduction in the trade deficit as we continue to export more every year, bodes well for a robust equity market.

Read this week’s Thought of the Week to learn more about manufacturing in the U.S. and where the market may be headed.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.