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NEWS | 2012 | Economic outlook - US Manufacturing

10 Apr 2012

Economic outlook - spotlight on US manufacturing

This month, the headline data for the Manufacturing Purchasing Managers Index was released. The data is often a good indicator for economic and investment performance. The latest readings made for interesting analysis and sums up how we see the world. A figure of above 50 indicates growth, a figure below indicates contraction.

Despite the recent falls in government bond yields (although Spain’s is rising again) and rise in European equity markets, the data points to a potentially disappointing continuation of recessionary conditions. Non-eurozone countries, such as Norway, Switzerland and the UK are faring much better and points to a brighter outlook. However, the most interesting data is from the US.

We have said for some time that out of the developed world, the US continues to look the most attractive from an economic and investment perspective. This is despite its precarious political and fiscal position. A recent report from Bank of America/Merrill Lynch looks into US manufacturing in more detail. The makeup of US manufacturing is evenly spread, with computer and electronic products, chemicals, food and beverage, petroleum and coal and metals all accounting for 10% or more.

US manufacturing has been in long-term decline, despite this, the US is still one of the world’s largest manufacturers and accounts for around 19% of all global goods produced. It also contributes over $1.5 trillion to US GDP (up from $500 billion in 1980).

The fall in grace of US manufacturing has helped to improve the efficiency and competitiveness of US industrial production. The Bureau of Economic Analysis calculated that every $1 of GDP derived from manufacturing creates an incremental $1.42 of economic activity from sectors such as accounting, transportation and wholesaling. The improvements in efficiency and competitiveness can be seen through the decisions of many multinationals to return to the US to manufacture of goods. A recent example is the decision by VW to make its new Passat model in the US, which will result in a $10,000 saving on the production of each car compared with Germany.

China is clearly the location of choice for low-value manufacturing but with wage growth in China running at roughly 20% and the fact that the US worker hasn’t seen real wage growth for 5 years has meant that the cost differential is reducing in favour of the US. US productivity per worker is higher than the Chinese and labour costs in China have become 40% more expensive compared with US labour costs since 2004, a trend that is accelerating. A study by the Boston Consulting Group suggested that there is now less than a 10% cost differential between manufacturing on the Chinese East coast compared with the US (once transport is taken into account). The study also estimated that the US manufacturing renaissance should add 2.5 to 3 million jobs to 2015, reducing the unemployment rate by 1.5%.

Whilst still early days, the trend in US manufacturing is encouraging and longer-term will help the US battle its huge deficits. This, together with the potential for shale gas, makes the US an interesting prospect for industries that have shunned the US for the last 30 years. The global economy continues to change rapidly and so it remains ever-important for investment portfolios to be kept closely aligned to changing opportunities.