The possible coming rebirth of U.S. manufacturing might turn out to be the most important investment story of the next decade, up-ending the winners and losers of the former world order.
The U.S.'s share of global manufacturing output fell by 23 percent in the 40 years to 2010, as China rose, outsourcing boomed and a new highly integrated global supply chain was born. This has utterly remade the U.S. and global economies, affecting everything from how much and how U.S. workers make money to how most companies are organized and compete.
Now a combination of factors - from cheap U.S. energy to new technology to a falling wage gap - may partly reverse some of those changes, bringing some manufacturing back on-shore.
If, and to the extent, this happens, literally every investment in your portfolio will be affected.
RENAISSANCE OR CYCLICAL UPTURN?
First off there is a host of solid reasons to think U.S. manufacturing may finally be catching a break. The low-hanging fruit of globalization has mostly been gathered, and while we can't expect a return to the U.S. dominance following World War II, many of the advantages enjoyed by U.S. competitors have been eroded.
Energy is a great example. The discovery and exploitation of shale gas and other new energy sources in the U.S. will likely give manufacturers close to the source a real and ongoing cost advantage. Consultants PWC have estimated that an additional one million manufacturing jobs may be created by 2025 solely due to the advantages of cheap shale and demand for the products used to extract it. That alone is 1/6th of all the manufacturing jobs in the U.S. which disappeared between 1998-2010.
At the same time, the wage gap between China and the U.S., once vast, has been narrowing sharply. While Chinese factory workers cost just 3 percent of their U.S. counterparts in 2000, by 2015, according to Boston Consulting, they may cost 17 percent as much. And while productivity per worker hour is growing in China, it is not keeping up with wage growth. Taking all costs into account, Boston Consulting says that South Carolina, Alabama and Tennessee are among the least expensive manufacturing locations in the industrialized world.
Technological change may also benefit the U.S., notably the rise of 3-D printing, a form of manufacturing where products and parts are literally sprayed into existence by laser and other printers, rather than being hewn from solid metal. It makes the most economic sense to site 3-D plants close to markets and in places where intellectual property rights will be best protected, two arguments in favor of the U.S.
To be clear, this is a speculative play. New energy sources may well be found elsewhere, wage growth might accelerate in the U.S. and any number of other roadblocks can and probably will arise. What now looks like a secular shift may turn out to be just a cyclical recovery in manufacturing, and possibly a short-lived one.
HOW TO PLAY IT
One huge beneficiary of all of this will be the U.S. Treasury and its securities. Higher tax revenues and growing employment will make deficit issues easier to handle, while an improving trade balance should benefit the dollar.
While energy production and related companies will be an obvious beneficiary, expect better growth in manufacturing to also help chemicals and capital goods firms.
But, just as the hollowing out of manufacturing hit everything from house prices to banks in the mid-West, so will the benefits of a reversal be widespread.
"Due to the strong multiplier effect of manufacturing jobs, the beneficiaries of a U.S. manufacturing renaissance will be found in small and midsize U.S.-focused industrial suppliers and in other sectors of the economy," Shirley Mills, of fund manager The Boston Company, argued in a recent paper.
That means everything from component suppliers to retailers to banks.
Catching the flip side of this trade, lightening up on those who will be hurt, is just as important. The obvious losers are emerging market countries and companies, which will be at a relative disadvantage and which, if manufacturers, may have to cope with rising wages and falling profit margins.
You might also want to look skeptically at some of the classic U.S.-listed, globally diversified companies which have done so well in the past decade or two. If re-shoring - the bringing back to the U.S. of manufacturing - becomes economically compelling, the global supply and production chain many of these companies have built will be an expensive and counterproductive sunk cost.
Your best bets therefore may be the smaller and midsize publicly traded companies which have never been able to diversify production internationally.
Like offshoring, this is likely to be a big and slow-moving trend, so making slow but significant changes to portfolio holdings over time is probably the strategy which offers the best risk/reward combination.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at email@example.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
(James Saft is a Reuters columnist. The opinions expressed are his own)