Day: September 7, 2024

Investing.com — The idea of a U.S. manufacturing resurgence has been a prominent topic in political discussions in recent years, with promises of reviving the industrial strength that once characterized the American economy. 

Both the Trump and Biden administrations have introduced ambitious initiatives aimed at reshoring manufacturing, including tariffs, tax incentives, and substantial government investments, said analysts at Alpine Macro.

U.S. manufacturing has been in gradual decline for decades. In the early 1970s, manufacturing value added made up 23% of GDP, but today it stands at around 10%. 

While a few key sectors have helped lift overall figures, median output across sub-industries has fallen by 20%. 

This indicates that, rather than a broad recovery, the modest increases in output are concentrated in a small number of industries, such as semiconductors, leaving much of the manufacturing sector stagnant.

“In terms of employment, the secular drop in manufacturing payrolls has continued, although there has been a gain of 1.5 million manufacturing jobs since 2010,” the analysts said, this recovery is small in comparison to the 6 million manufacturing jobs lost in the 2000s. 

With manufacturing jobs now making up just 8% of the workforce, the sector’s long-term decline continues, raising questions about claims of an industrial revival.

While there has been an increase in manufacturing investment, it has been restricted to specific industries like semiconductors. Overall capital investment in manufacturing has stagnated, with fixed asset formation flat for decades. 

Capital outlays on equipment, which once accounted for 8% of GDP in the 1980s, have dwindled to a mere 5%. This slowdown in capital accumulation is closely tied to diminishing productivity in the sector, further undermining any claims of a renaissance. 

In fact, Alpine Macro’s data show that productivity growth within manufacturing continues to lag behind other segments of the U.S. economy, making it unlikely that the sector will experience a broad-based recovery​

The structural challenges facing U.S. manufacturing extend far beyond investment and productivity. As economies evolve, the transition from industrial-based growth to service-driven economies is inevitable. 

Wealthier societies tend to shift their consumption patterns away from goods and toward services, diminishing the overall importance of manufacturing. 

Even China, often regarded as the world’s manufacturing powerhouse, has seen a decline in its manufacturing share of GDP since 2008. 

This broader economic shift renders attempts to re-industrialize the U.S. not only difficult but also largely counterproductive. 

High-income countries like the U.S. would need to rely heavily on exporting manufactured goods to achieve any meaningful manufacturing expansion, a model that has not resulted in higher income growth for other industrial giants like Germany and Japan​

One of the most significant hurdles to a U.S. manufacturing revival is the country’s high labor costs. American workers are about 70% more productive than their Chinese counterparts, yet they earn six times the wages. 

This disparity makes it nearly impossible for U.S. companies to compete in labor-intensive industries, regardless of how efficient their operations may be. 

As a result, the U.S. manufacturing sector remains concentrated in high-value, specialized industries such as aerospace, advanced machinery, and medical devices, while industries requiring more labor have increasingly shifted operations to lower-cost countries like Vietnam and Cambodia​

Alpine Macro flags that much of the rhetoric surrounding a manufacturing renaissance is driven more by political motivations than economic realities. 

The promises of revitalizing domestic manufacturing play well in swing states like those in the Rust Belt, where industrial job losses have taken a significant toll on communities. 

However, policies aimed at reversing these trends, such as the Biden administration’s Inflation Reduction Act (IRA) or Trump’s tariffs on Chinese imports, have failed to deliver meaningful results. 

While the IRA has spurred nearly $400 billion in investment, these efforts have been narrowly focused on semiconductors, with other critical sectors, such as electric vehicles and green energy technologies, seeing little benefit

Further complicating the situation is a lack of skilled labor to meet the potential demand in advanced manufacturing. 

The pipeline of new workers is insufficient, and the manufacturing workforce continues to age, with those under 25 comprising only 9% of the sector, compared to 13% across all other industries.

Moreover, bureaucratic red tape has caused significant delays in many of the large-scale investments planned under the IRA, casting further doubt on the policy’s long-term impact

From a market perspective, Alpine Macro underscores the lack of tangible benefits for industrial stocks. The sector continues to underperform, reflecting the broader productivity stagnation in manufacturing. 

Although government subsidies have boosted the U.S. chip sector, the tightening of export controls, particularly those targeting China, threatens to erode these gains. 

“In 2021, China accounted for $18 billion, or about 23%, of U.S. semiconductor and circuit-related exports,” the analysts said. In the long run, China’s increasing self-sufficiency in low-end semiconductor production could intensify competition and limit growth opportunities for U.S. firms

While the U.S. onshoring narrative remains politically charged, a more significant trend is emerging: the rise of “friend-shoring.” 

U.S. companies are increasingly relocating production to countries with similar wage levels and economic complexities as China, but with less geopolitical risk. 

Nations like Vietnam, Malaysia, Mexico, and India are poised to benefit from this trend as companies shift away from China in response to escalating tensions between Washington and Beijing. 

For investors, this presents new opportunities as global supply chains realign, even as the vision of a domestic manufacturing revival in the U.S. fades further into the distance​

Investing.com — In the current volatile market, where mega-cap tech stocks are seeing fluctuations and bond yields are moving unpredictably, however, one sector shines for its relative stability and strong performance which is the U.S. infrastructure. 

The attractiveness of this sector extends beyond short-term cycles, being driven by strong underlying fundamentals and supportive government policies. 

Analysts at Gavekal Research flag that U.S. infrastructure investments have become a reliable refuge for investors looking for stability amidst market uncertainty.

Since mid-July 2024, the stock market has been on a roller-coaster ride, particularly for technology stocks, which have shown significant volatility. The MSCI U.S. Information Technology Index, for instance, remains 6.5% below its July peak.

“The jitters suffered last week by Nvidia (NASDAQ:NVDA) points to market leaders running on fumes,” the analysts said. In contrast, U.S. infrastructure stocks have performed exceptionally well, with the sector’s MSCI benchmark reaching new highs. 

One of the primary drivers of the U.S. infrastructure sector’s resilience is the continued support from the federal government. President Joe Biden’s 2021 infrastructure legislation, which allocates significant funding for projects through 2026, provides a strong foundation for the sector.

Moreover, infrastructure investment enjoys rare bipartisan support, as evidenced by the energy bill advanced by Senator Joe Manchin and Republican Senator John Barrasso. Regardless of the outcome of the upcoming general election, U.S. infrastructure is likely to remain a top priority, ensuring continued funding and support.

Investors seeking a safe harbor in anticipation of a potential U.S. recession might find solace in infrastructure plays. Unlike highly growth-sensitive sectors like industrials, infrastructure stocks primarily fall within the defensive communication services and utility sectors. 

These sectors are known for their stable cash flows, which tend to be less affected by economic downturns. Furthermore, during a recession, interest rates are likely to drop significantly, benefiting the long-duration return profile of infrastructure stocks.

The recent volatility in large-cap tech stocks raises the question of whether the AI boom is nearing its end or simply experiencing a temporary pause. Regardless of the answer, U.S. infrastructure stocks appear well-positioned. 

If the AI boom picks up again, infrastructure investments might still deliver solid performance, even if they lag behind tech stocks. However, if the AI boom is truly winding down, investors could return to infrastructure, which saw strong gains following the passage of Biden’s infrastructure law in 2021.

In a comparison between U.S. infrastructure equities and large-cap tech stocks, the former offers a more attractive value proposition, particularly in the current market environment.

Although U.S. infrastructure investments are generally viewed as a safe choice, they do come with risks. A sudden increase in oil prices, potentially caused by rising geopolitical tensions, could drive up U.S. yields, which may adversely affect infrastructure stocks. 

“The chance of an escalatory cycle playing out in the RussiaUkraine war and heightened tensions in the Middle East means an oil price spike cannot be ruled out,” the analysts said.

Nonetheless, Gavekal Research analysts point out that market reactions to geopolitical events are typically short-lived. Consequently, investors might see any resulting dips in infrastructure stocks as buying opportunities, given the sector’s strong fundamentals and appealing valuations.

The Swiss National Bank (SNB) has made headlines by being the first major central bank to lower interest rates in recent months. This decision was motivated by inflation falling back into the SNB’s target range.

Switzerland has seen milder inflation than many other major economies. The Swiss National Bank’s actions have helped to keep inflation in check. Overall inflation in August 2024 was 1.3%, primarily driven by higher rental costs.

When excluding rent increases, inflation was even lower at 0.8%, suggesting that underlying prices might be declining. “As this happens, the overall inflation rate could fall to below 1%,” said analysts at Alpine Macro.

The Swiss National Bank cut interest rates due to a rapid decrease in inflation, which has returned to its target level.

Unlike other countries experiencing persistent inflation, the SNB is worried that inflation might drop too low, potentially harming economic stability. This concern is heightened by Switzerland’s slow economic growth and increasing unemployment.

Switzerland’s economic outlook is increasingly concerning, with several indicators pointing towards a period of sluggish growth. “The PMI remains below the critical 50 level, indicating that sluggish growth should persist,” analysts said.

Concurrently, the Employment PMI suggests that the labor market is softening, with unemployment expected to rise. This combination of low inflation and weak economic growth could push the SNB to further ease its monetary policy.

Slower wage growth has contributed to a decrease in inflation, especially in the service sector. Services, excluding rent, make up a big portion of the Consumer Price Index (CPI), and any weakness in this sector could further lower overall inflation. This might lead to more aggressive interest rate cuts by the SNB.

The market is expecting the SNB to lower interest rates to about 0.5% by mid-2025. However, some experts believe this expectation might be too conservative.

If inflation keeps falling, the SNB could be forced to cut interest rates even more, possibly all the way to zero. This would mean a real interest rate of -0.5%, considering inflation could drop to 0.5%.

Former SNB President Thomas Jordan has previously indicated that the neutral real policy interest rate is near zero. If inflation drops below the SNB’s target, the central bank may need to implement a more stimulative policy by cutting rates below the neutral level. This scenario could see the SNB adopting a zero-interest-rate policy to counteract the deflationary forces in the economy​.

Alpine Macro suggests that investors holding Swiss bonds should consider maintaining a higher-than-average duration to potentially benefit from rising bond prices if the Swiss National Bank lowers interest rates to zero.

However, for global fixed-income portfolios, a slightly reduced allocation to Swiss bonds might be advisable, as other central banks may have more room to cut rates, potentially offering greater upside potential.

Moreover, the narrowing interest rate differentials could strengthen the Swiss franc, suggesting that global bond investors should avoid hedging FX exposure to the franc.

Additionally, Switzerland’s economic situation may offer insights into potential developments in other G10 economies, where downside inflation surprises could similarly force central banks to reconsider their monetary policies​.

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