For the last three years, manufacturing activity has been growing more rapidly than the gross domestic product. This is the first time this has happened in more than 50 years.
Most manufacturing organizations can break their major cost structures down into the following broad categories:
- Raw materials, including energy.
- Cost of capital, including interest.
- Inventory costs.
- Research and development.
- Selling, general and administrative expenses.
- Taxes and regulations.
Here is a quick summary of what has changed over the last three to five years regarding many of these costs within the U.S. manufacturing complex.
- Raw material costs in the United States are among the lowest in the world. As of this year, the United States is the largest producer of not only natural gas, but oil. Thanks to fracking activities, the United States has now surpassed Saudi Arabia as the world's No. 1 producer of oil. U.S. natural gas prices are among the lowest in the world. Due to the number of manufacturing processes that are very energy-intense, these low prices serve as an advantage to U.S. manufacturers.
- Cost of capital. Outside of Europe and Japan, the United States sports very low interest rates in relation to other less-developed countries.
- Labor-to-capital investment decision. Perhaps the biggest development favoring U.S. manufacturers vs. their foreign competitors is the outright structure of the factory floor. No longer a haven for wrench-turners and unskilled labor, the modern factory floor is staffed with industrial robots, computers and instrument precision tools. Fewer workers are needed in today's modern factory than in the past. Those who are working at the factory often need skills laborers of the past didn't require –- and skills many foreign factory workers don't possess. These changes have reduced the headcount needed in many manufacturing operations. Automation and technological advancement has been put to work in the modern factory floor, significantly reducing the low cost-of-labor advantage of many less-developed manufacturing economies.
- Transportation. Generally, it costs less to ship goods within the United States than bring them across the Pacific Ocean via ship. Consequently, many domestic manufacturers have a built-in advantage on transportation costs as compared to their foreign competition.
Bringing It Forward
U.S. and global economies have been growing at a very sluggish rate. We expect to see an uptick in overall economic activity during the second half of 2014, with manufacturing activity leading that growth push. The Purchasing Managers Index -- surveys of manufacturing purchasing managers –- isn't skewed by governmental bias. A reading above 50 suggests manufacturing activity is expanding.
|June Purchasing Managers Index||May Purchasing Managers Index|
|Emerging economies (estimate)||50.6||50.1|
Secular vs. Cyclical
The secular (long-term) trends I noted earlier outline why, in my opinion, manufacturing activity within the United States should continue to expand. From a cyclical (short-term) standpoint based on the most recent data from the global PMI survey, it appears activity on the factory floor should continue to expand over the next three to six months.
Indeed, U.S. factories are huffin' and puffin.'
Bill Greiner is chief investment officer of Mariner Wealth Advisors.