The Myth of a Manufacturing Renaissance

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It’s official: for the first time since the banking crisis began, Chinese and American manufacturing are in contraction. The rate of decline has become not only headline stuff, but a plea for help. According to the dominant narrative, U.S. manufacturing had turned in a positive direction following the Great Recession of the 2000s.

High prices for domestic oil and gas, as well as rising labor costs in China, were meant to usher in a new era of American manufacturing—a so-called “renaissance” that people have only now begun to realize never existed.

Instead of a renaissance, we’ve only seen more pain: there are 15,000 fewer production facilities and a staggering 2 million less jobs since 2007. Overall, manufacturing is down 3.2% . It’s become glaringly obvious that the rhetoric about a manufacturing rally has been all fluff and no substance.
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Last week we got the latest read from the Institute for Supply Management (ISM) on the state of the sector. U.S. manufacturing has declined to 48.6 from 50.1 (a read below 50 shows the economy is contracting).

Despite pockets of optimism including autos, medical devices and transportation equipment (which I think is mostly airlines like top-performer Boeing (BA) and not rails), even strong numbers there haven’t been enough to lift the sector up by its bootstraps.

In October, manufacturing output rose for the first time in months, and yet the ISM index remains at its lowest levels since 2009, the midst of the post-2008 recession.

There are a lot of factors at play here but foreign markets and a strong dollar are among the main culprits. Even though it’s a direct competitor, the weak Chinese economy is hurting American manufacturing, as the strong dollar slows U.S. sales to China and other countries who can just buy what they need for cheap in Europe. Markets in deep recession like Russia or Brazil simply won’t shell out for expensive U.S. goods, and our trade deficit isn’t getting any better.

One way we could improve the situation is to stop outsourcing so much production overseas. The U.S. manages the research and development (R&D) of cool, cutting-edge tech like flexible electronics and self-driving cars, but handing manufacturing over to foreign countries means we can’t take full advantage of those lucrative markets as they emerge.

That’s what happened with solar cells and lithium-ion batteries a few years ago—and we suffered for it.

Wall Street wasn’t expecting its first manufacturing contraction in three years—but it’s happening, and the stock market is actually weathering it pretty smoothly.

Manufacturing is a much smaller part of the U.S. economy than in the past (at about 12%), but the drag from the strong dollar will persist, especially if the Federal Reserve follows through with a rate hike this month.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/the-myth-of-a-manufacturing-renaissance/.

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