Permanent Value

Week in Review 3/20/14

Bruce Doole
March 20th, 2014

The American Industrial Renaissance Revisited

It remains unlikely that the United States will be the manufacturing powerhouse that it was during the 1950s and 1960s, but many factors are suggesting that the U.S. industrial sector will continue to gain market share.

More recently, investors have apparently begun to recognize the economic and political headwinds facing companies that operate within the emerging markets. In 2013, U.S. equity funds had an annual inflow for the first time in a number of years, but also had slightly stronger inflows than did EM equity funds.

Because of the lack of sustained interest in U.S. stocks, the American Industrial Renaissance investment theme appears to still be in its early stages. While recognition of this theme has begun to grow, it has not yet become mainstream.

There are many reasons why the U.S. manufacturing sector seems likely to gain market share, including wages and productivity.

Wages and productivity

Markets do not value assets on the absolutes of good or bad. Rather, markets price on whether fundamentals are getting better or worse. Investors, therefore, should generally ignore analyses that don’t highlight measures of marginal improvement or deterioration.

With that in mind, wages within the U.S. industrial sector seem to be increasingly competitive. For example, manufacturing wages in China increased 18% per year over the five years from December 2007 through December 2012, whereas U.S. manufacturing wages rose 2.3% per year.

Unit labor costs are the link between productivity and the cost of labor. When unit labor costs are rising, wages are increasing faster than productivity, which suggests decreased competiveness. Conversely, when unit labor costs are falling, productivity is rising faster than wages, which suggests increased competitiveness.

 

This Week’s Economic Data

  • Jobless claims fell by 9,000 to 315,000. Continuing claims, which lag by one week, were down 48,000 for the March 1 week.
  • Retail sales rebounded 0.3% in February after dropping 0.6% in January, increasing for the first time in three months.
  • The Producer Price Index dipped 0.1% in February after rising 0.2% in January.

 

Source: Eaton Vance/ Ivy Funds