The most recent Manufacturing ISM Report on Business, released in February, reported an increase in economic activity for U.S. manufacturing in January. We believe manufacturing will continue to see an upward trend for the foreseeable future supported by the current macro-economic and political climate in the U.S., and that growth will be driven in part by continued reshoring.
U.S. manufacturing was challenged by two major pieces of legislation enacted in the 1990s and early 2000s that proved detrimental to the U.S. economy—NAFTA and accepting China into the WTO. These developments introduced a much cheaper labor force for U.S. businesses, and companies took advantage of lower cost labor by moving their plants, factories and supply chains offshore. This created a substantial difference in U.S. imports/exports, resulting in a large trade deficit.
A July 2019 article in IndustryWeek notes how eliminating the deficit would lead to 5 million new manufacturing jobs in the U.S. While we don’t believe the U.S. will eliminate the trade deficit, we do see the continued reshoring of manufacturing that is driven by the following factors:
- The delta between U.S. and China labor rates has narrowed
- Total cost of offshoring has increased
- The supply of U.S. energy is ample and less expensive
- Overseas regulations have increased
- The complexities of customer support post-sale persist
Also noted in the IndustryWeek article, over 1,300 companies have announced their plans to reshore, and that can positively impact manufacturing plants, supply chains and supporting services. The recent trade agreements and tariffs enacted by the current Administration continues to drive this shift. According to a February 2020 Bank of America report, a “tectonic shift” is about to bring supply chains and jobs back to shores that exported them in previous years. In line with BofA’s views, automation and industrial are two sector areas where we see investment opportunities.
Economic growth in the U.S. is driven by consumer demand and a combination of labor growth and productivity gains. Two things to consider: the latent demand in the U.S. is due to the over 60 million millennials that are delaying buying cars and housing. We believe consumers in this demographic will become active when they start families. The other factor to consider is inflation. According to articles in Bloomberg as well as commentary by Ed Yardeni of Yardeni Research, views are that inflation is not a threat. The U.S. hasn’t seen significant inflation since early in Ronald Reagan’s second term.
Lastly, the confluence of lower energy cost, automation, lower cost of capital, and increasing consumer demand are all contributing to the current economic cycle and we expect this cycle to continue. We believe businesses that increase the use of automation on the factory floor will benefit the most in the current environment. As such, U.S. companies that deploy automation and robotics can lead the world in manufacturing.
Our view is that the U.S. economy will continue to grow, which will be beneficial for U.S. manufacturing businesses as well as provide attractive investment opportunities.
Russell J. Greenberg is managing partner and Peter Polimino is CFO of Altus Capital Partners, a private equity firm that invests in middle market manufacturing businesses.
