|The American Manufacturing Renaissance
The Big Untold Story: “Made in The USA” is Back
|Hydraulic Fracturing is a Game-Changer|
The big story of 2013 is already proving to be the big story of 2014 – and beyond. “Made in USA” – a term that was written off just five years ago – has come back slowly but steadily. Investors have followed suit by revaluing American industrial companies and driving a raging bull market that drove the US equity market indexes by over 26% in 2013. The bull is apparently still firmly in place having survived the near default of the U.S. government, Europe’s debt crisis and the political turmoil in Syria and the Ukraine.
The US economic recovery has been more rapid and more systemic than other developed countries due to a combination of structural advantages and timely developments. For perspective, consider that the US has roughly 5% of the world's population, but US Gross Domestic Product represents roughly 22% of the World's GDP and the US stock market represents nearly half of the world's stock market value.
The three key drivers of this current growth are low energy costs, a culture of innovation and entrepreneurial spirit, as well as a growing and well-educated population.
ENERGY: The historical worry that American's voracious energy demands pose economic risks limiting growth and that energy reserves were being rapidly depleted has never been less true. US domestic production of natural gas and oil has been ramping up (not down), thanks largely to fracking technology. In fact, in the next few years, the US is expected to pass Saudi Arabia as the world's top oil producer. As a result, U. S. energy costs are often a fraction of its competitors allowing the US to become the lowest cost producer for many products.
A GROWING WELL-EDUCATED POPULATION: While many countries are contracting, the United States is still relatively young with a growing population, largely thanks in part to immigration. The world's top students continue to flock to America's Universities and people from around the world seek to come to the US because they see an opportunity to improve the lives of their families. From 1901-2012 a remarkable 350 of 853 Nobel prizes went to individuals residing in the United States and in 2013 alone 9 prizes were awarded to Americans.
Even the optimists, though, cannot ignore the fact that the global financial crisis left many scars. Many US investors have taken a cautionary stance and are still underweight in US stocks. A recent poll found that 59% percent say things are going badly in the economy (less than a quarter said conditions are improving). Even though US stock markets have more than fully recovered from the crisis, US stocks are in a solid bull market going much higher (but that's an article for another day) and the great American recovery is gaining speed and momentum. As the “Great Rotation” from bonds into equities continues, it will place more upward pressure on equity prices.
Recovery from the global crisis is certainly not complete. Corporate earnings are strong and growing, but jobs remain scarce. For the moment, we are stuck in a stereophonic economy with consumers struggling while corporate America booms.
Most technical indicators point to ongoing industrial growth. Deleveraging held back spending in recent years, but debt is expected to be less of a drag going forward with lower rates encouraging corporate borrowings again. US housing is slowly rebounding from the housing bubble collapse, which has improved homeowner balance sheets.
Interest rate worriers are ignoring the fundamental realities of money supply. While many fear the US Federal Reserve's expected “tapering” of quantitative easing, it seems likely that inflation and interest rates are low and are likely to stay low. Annual US core inflation as of January 2014 was just 1%. The US dollar remains the world's reserve currency and safe haven, (the Euro, once thought to be a challenger to the title, is currently little threat) and foreign investors still favor the US for their investments.
Businesses stayed lean during the crisis, so the average age of fixed assets used in manufacturing rose. Therefore upgrading is needed and increased investment and capital spending on manufacturing equipment should provide additional growth. Recent projections from the captains of industry accordingly call for increases in revenues, profits, employment, and spending in coming years. Many believe this recovery is healthier because it is being led by the industrial sector rather than by consumer spending.
To really appreciate the untapped potential of the American economy, it’s crucial to understand that the world is currently experiencing the third great Industrial Revolution. The first revolution (roughly 1750 to 1830) included James Watt's steam engine advances, plus farming and textile improvements. The second revolution (roughly 1870-1900) included Thomas Edison's invention of the light bulb, the adoption of electricity, the internal combustion engine, and running water.
Our current third revolution began roughly in the 1970s with Intel’s microprocessors and advances in silicon. This revolution (including advances in computers, the internet, mobile phones, and social networks) is impacting the costs and efficiency of businesses of all sizes – and indeed every aspect of society.
Legendary investor Warren Buffett stated last year that the US isn't an economic powerhouse because Americans are smarter or work harder. The key to US economic success is its democracy and capitalist economy. Buffett noted “we have a system that unleashes potential, and it’s just starting”.
All the fundamentals are in place for the Manufacturing Renaissance of this decade to continue to thrive. Investors who still think its 2008 do so at their own financial peril.
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