China’s Woes Create Energy for America’s Manufacturing Comeback

If you have been paying attention, the largest non-U.S. market, China has been having a rough time of it economically. This isn’t a sudden development, as I pointed out in my ‘what if’ scenarios I wrote about in early 2023:

“What if China doesn’t prove to be the big bad wolf that everyone is fearing?
In reality, China has enormous economic problems of their own. They are facing strong headwinds due to their aging population. Unlike the United States, which has a powerful and flourishing millennial generation to be handed the baton, China’s one-child policies have had a devastating effect. This has been especially destructive regarding China’s uncontrolled real estate speculation in recent decades. With no one to occupy the glut of housing, a credit disaster looms. Our research partner, Hedgeye Risk Management has done extensive and compelling research on China’s demography nightmare. Evidence suggests negative population growth for China could be as soon as this year.”

Fast forward to today. China’s economy is experiencing substantial deflation; the housing market isn’t stabilizing due to decreasing population, especially of working age people. At the same time, costs continue to rise. I believe we are going to see a lot of China’s manufacturing rotate over to India, Vietnam, or other Southeast Asia countries in addition to the U.S.

China’s deepening problems should continue to be good news for American manufacturers. Global industries now appear to be seeking alternatives to the “world’s factory” to avoid geopolitical risk and government interference.

Manufacturing has always been an integral part of the American economy. Factory work in America can trace its roots back to 1785 when Oliver Evans built the first automatic flour mill. A boon in manufacturing came after the Civil War and half a century later, Henry Ford’s assembly line made cars affordable to the masses. U.S. industrial might helped win World War II, when nearly half of private-sector employees worked in factories.

As globalization followed, the United States was the world’s manufacturing leader from the late seventies through early nineties. Production capacity, which had grown at about 4% a year for decades, flattened after China’s controversial 2001 entry into the World Trade Organization. China quickly became the world’s low-cost manufacturer. The world economy was being driven by equal globalization.

But that was then, this is now. Due largely to actions taken by previous and current U.S. administrations in the form of tariffs, de-globalization has created a path for manufacturing to come back to our country. As manufacturing returns to the U.S., financial markets will respond accordingly and investor confidence will continue to rise.

As an investor, you may be asking: “Why should this matter to me?” David Mindell, a professor of the history of engineering and manufacturing at the Massachusetts Institute of Technology, said major cycles such as the rise of the microprocessor, typically play out over several decades. “The factory boom signals that the U.S. is at the start of a new cycle”, he said.1

Moreover, the most important advantage America possesses is our greatest resource – energy. Especially when coupled with our ability to guarantee safe exports worldwide. The U.S. remains a major producer of crude oil and a significant exporter of liquefied natural gas (LNG). This can only strengthen American influence in the world economy. China on the other hand, is the largest consumer of primary energy worldwide. Its reliance on energy imports from other countries can create energy security concerns – something the U.S. can and must avoid at all costs.

Energy independence has been a hot topic in the last three Presidential elections. Booming energy production means lower prices from transportation to manufacturing costs, which would be critical for lowering inflation. And thousands of well-paying jobs currently in limbo would be unleashed, particularly in the natural gas industry here in the Keystone State.

The recent growth experienced by the U.S. stock market has been largely homegrown, as evidenced by the “Magnificent Seven”. Beyond surface-level growth in the markets, it is innovation and strong underlying business fundamentals that have separated us from other economic powers. Now, further economic opportunity may be broadening due in large part to China’s woes. We can potentially use energy in conjunction with the reshoring of manufacturing as an economic weapon, increasing our independence from overseas influence.

Furthermore, if China isn’t buying commodities to support manufacturing, then commodity prices will continue to decline, and inflation should follow. Traditionally, when commodity prices have gone down, stock prices have done the opposite.

All of this represents a good reason to stay invested in the U.S. stock market, while maintaining healthy diversification within in your portfolio. As an investor, embrace the innovation and growth facilitated by free markets and stay with it, just as our America has done with manufacturing.

Thanks for reading.
Dave