February 18, 2014

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Full Steam Ahead

The U.S. Manufacturing and Energy Revival

By Matthew D. Pappas

February 18, 2014

Two key themes are emerging in the United States: first, a resurgence in manufacturing, and second, energy independence. These two developments could singlehandedly send the United States into a new age of growth and prosperity.

Manufacturing Revival

In manufacturing, cheaper labor costs and new production capabilities are driving many businesses to expand and relocate plants back to America. In energy, new technologies allowed more reserves of oil and cleaner-burning natural gas to be discovered right in our own backyard. Combined, these two trends could create many new jobs and boost our long-term sustainability.

The U.S. manufacturing revival has already begun, and the data show that it’s on an upward trend. China, with its longstanding perception of being a cheap labor hub, has seen labor costs more than double over the past decade, while labor costs in the United States have declined by more than 30 percent. And in 2012 alone, more than $9.5 billion was spent on new U.S. manufacturing plants by various well-known companies—this during a year when we had a polarizing presidential election, gridlock in Washington D.C. and a stubbornly slow economy. Those billions were spent despite the unease and uncertainty caused by those events and, in fact, most of it was spent before the outcomes of the elections were known.

More importantly, these plants are now able to adopt newer, more advanced technologies. Take 3-D printing for example—this could completely revolutionize the basic manufacturing process but it is very difficult to implement in older facilities. Newer U.S. plants, however, are being designed to incorporate 3-D printing, advanced robotics and Artificial Intelligence (A.I.). Once fully operational, they could effectively dwarf the productivity of their older counterparts that are located in areas like China and Korea. When you consider the costs of shipping internationally and the political risks of doing business in other countries, it becomes even more attractive to have these plants back in the United States.

Some claim that new robotics and A.I. will actually reduce manufacturing jobs instead of increasing them. I see it differently, as we’ve faced similar “creative destruction” before. In 1869 for example, more than 46 percent of the U.S. population was employed in agriculture. Today that number is less than 1 percent, but the production level is 16 times higher. During that time we had many technological advancements with entirely new industries emerging in the process—think automobiles and personal computers. Innovation can spawn new jobs while making others obsolete. It’s happened in many different businesses with a very positive impact overall. I don’t see how this time is any different.

Energy Independence

The second theme, energy independence, could dramatically drive down our energy costs in the long term. According to First Trust Portfolios, natural gas production has increased 25 percent from 2,000 to nearly 2,500 billions of cubic feet in the past 12 years, while the total gas rigs in operation have declined from about 1,600 to just 400. With just the known natural gas and oil reserves in the United States today, we could easily trump those of Saudi Arabia, Iraq and Iran a few times over. And that’s only based on today’s technology.

Additionally, the Mexican government recently abolished a 75-year-old law that prohibited outside energy firms from operating independently in Mexico. The Eagle Ford Shale deposit, which runs from Texas into Mexico, holds massive reserves of oil and natural gas. This means that large energy firms could tap into this deposit and potentially provide many more jobs to not only the U.S. citizens but to citizens of Mexico as well.

According to independent data from IHS, in 2012 the energy boom created an average $1,200 of additional disposable income for the average household, and that is projected to more than double to $2,700 by 2020. IHS data also suggests that unconventional oil and gas supported 2.1 million jobs in 2012 and is projected to support 3.3 million by 2020.

Furthermore, the United States currently has one of the lowest costs of natural gas for manufacturing purposes in the world. The current U.S. price of $4 ($/million British thermal units) is considerably lower than $17 for Korea, $14 for Japan and China, and $10 for Germany. Plus, more efficient drilling methods have dramatically reduced the environmental impacts of discovering these new reserves. CO₂ emissions have been on a declining trend since 2005, and the lower costs of natural gas could drive them down even further as more manufacturing plants switch to natural gas from coal. Overall, these are incredible figures that point to some very positive long-term trends.

The Big Picture

Just these two facets of the economy—manufacturing and energy—could help propel the United States into a new age of growth and prosperity. Given developments in these industries, investing in the United States and our future prosperity is very important. These two key themes could help propel the United States to re-emerge as the global superpower in a new and very exciting age. 

Matthew D. Pappas is a financial advisor with the Cottonwood Group of Wells Fargo Advisors LLC, a wealth management team based in Salt Lake City.

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