Reindustrialisation Risk

Excerpts:

"The reindustrialisation of America, if it occurs, will likely be bearish for US equities. The biggest medium-term issue for equity investors is whether current high profits can be sustained. One factor boosting margins was the Asian-led surge in global labour supply, which squeezed returns to labour and boosted returns to capital. This was particularly pronounced in America. Reindustrialisation implies that this process has run its course, suggesting that returns to capital will revert to normal over the medium term."

"Most see the prospect of America reindustrialising as bullish. In my view, that depends on whether you are an economist or whether you are an investor. The ‘deindustrialisation’ of America was bad for economic growth, but the increased global supply of labour lifted margins and total profits. The effect of wider margins on profits far outweighed the effect of two weak US GDP cycles (the cycles following the 2001 and 2008-09 recessions). Reindustrialisation may reverse this mix: Economic growth may improve, but margins worsen."

"The first point to note is that America hasn’t really deindustrialised. America remains the world’s largest manufacturer measured by value added (Exhibit 1). Manufacturing has been falling as a share of GDP in most developed economies. The decline in manufacturing’s GDP share in the US is not out of line with the decline elsewhere in the G7 (Exhibit 2)."

Exhibit 1

America Didn’t ‘Deindustrialise’…

Exhibit 2

…But Manufacturing’s GDP Share Did Fall