Tuesday, April 10, 2012

The Renaissance in U.S. Manufacturing

David Brooks has a good column in this morning's New York Times discussing the resurgence in American manufacturing.

Here's what he writes:

... Over the past five years, amid turmoil and uncertainty, American businesses have shed employees, becoming more efficient and more productive. According to The Wall Street Journal on Monday, the revenue per employee at S.&P. 500 companies increased from $378,000 in 2007 to $420,000 in 2011. 

These efficiency gains are boosting the American economy overall and American exports in particular. Two years ago, President Obama promised to double exports over the next five years. The U.S. might actually meet that target.


However, as Mr. Brooks notes, the resurgence in efficiency and profitability in U.S. manufacturing is not necessarily good news for the average American worker.

Companies have been using technology to make their operations more efficient. For example, it was only a generation ago that General Motors employed more than 400,000 workers in the United States; today, it produces nearly the same level of vehicle output with only a fraction of the previous workforce.

In addition, energy costs in the United States are a fraction of most of the rest of the world, thanks to the controversial fracking techniques that have unleashed huge supplies of natural gas.

States are intensely competing with one another to attract businesses, offering incredibly attractive tax incentives to companies who will open operations locally.

Meanwhile, overall tax rates are at historic lows in the United States, and there is apparently no political will to change this any time soon.

Meanwhile, wages in China - and other emerging markets - have risen to the point where the U.S. worker is cost competitive, after taking the superior productivity into account.

A number of analysts that I have heard recently have been echoing Mr. Brooks's comments. 

Yesterday, for example, I heard Merrill Lynch analyst John Inch described what he calls a "renaissance" that is occurring in the U.S. industrial sector.

He noted, for example, that Emerson Electric moved a large portion of its operations to China a few years ago.  Today apparently Emerson regrets this decision; not only is the cost advantage of China operations largely disappeared, but competition from other Chinese companies has driven their margins lower.

For a stock investor, then, one is left with the conundrum of record corporate profitability offset with stubbornly high unemployment rates.  How can the U.S. economy continue to improve if the American workforce is still so underutilized?

For now, at least, expect continued corporate growth - but a stagnant jobs market.