• Print
  • Default text size A
  • Larger text size A
  • Largest text size A

U.S. manufacturing comeback story

Materials producers, IT providers, residential construction, and more could benefit.

  • Industrials Sector
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.

Most people are familiar with the concept of the “butterfly effect,” usually paraphrased as something like: “A butterfly’s flapping wings in China may be the cause of a hurricane in Texas.” The general idea is that small changes in the initial conditions of a system may combine and lead to more significant effects down the line.

The “U.S. manufacturing renaissance,” a general term for the anticipated ongoing repatriation and growth of U.S. manufacturing capacity, may be partly understood as the product of a butterfly effect. Small changes globally, none of which may have been enough to cause a major shift in themselves, have greatly contributed to the conditions encouraging the resurgence in U.S. manufacturing. One way to quantify the end result is to look at job creation: for the first time since the mid-1980s, growth in manufacturing jobs in the U.S. has generally held close to job growth in the U.S. economy overall (see chart below). If the conditions stay conducive, this trend may continue.

China is at the root of several contributing factors. Wage growth there to support a burgeoning middle class has been relatively high. As the complexity of outsourced production has risen, worker productivity (output per worker) gains in China have not kept pace with wage growth, reducing the cost advantages of manufacturing there. Dealing with supply chain complexities adds additional complications, and companies are starting to realize that these are ongoing challenges rather than merely start-up costs of shifting plant locations. Chinese economic growth has greatly increased the price of commercial land there, and although there is still plenty of space in inland China, building a factory in a remote location adds to construction costs initially and then to ongoing freight costs for finished products. Overall, the option to build new plants in China to manufacture complex goods is simply not as compelling as it once was.

Some less tangible factors have also added to the butterfly effect. Many U.S. companies are concerned about the safety of Chinese-made goods and would rather produce domestically, where consumer protections are perceived to be more stringent and more strongly enforced. In addition, the Chinese attitude toward intellectual property has become a sticking point; U.S. companies may be hesitant to share patented information (both for items to be manufactured and for innovative production processes) in a legal environment of weak protection.

Domestic shifts have made a difference as well. To be sure, U.S. tax policy is still a headwind for the growth of manufacturing here, and corporate planners and investors alike must take current and potential policy into account. However, the abundance of local natural gas—used as both an energy source and a feedstock for chemical production—has made locating plants in the U.S. a much more attractive proposition. The depreciation of the dollar has also played a part, both in encouraging investment in factories here and in increasing the potential competitiveness of U.S.-made goods. These home-grown factors have encouraged both U.S. and foreign companies to increase their capital investments in new U.S. plants and infrastructure.

State of the industrials sector

It was a strong first half for industrial stocks. Tailwinds and headwinds abound now.
Read the article.

If the butterfly effect continues to sustain favorable conditions for a resurgence in U.S. manufacturing, a successful period of growth may launch a domino effect, with positive impacts rippling though many domestic industries and sectors. In the industrials sector alone, new plant build-out would benefit industries such as machinery, construction and engineering, electrical equipment, road and rail, and building products. An ongoing renaissance would increase employment in many industries supporting plants (as well as in the plants themselves), including commercial services and supplies (including security services, facilities services, and commercial printing), and professional services (including human resources and employment services). Materials producers, IT providers, residential construction, and even consumer discretionary industries may likely benefit secondarily from U.S. job growth in manufacturing.

Building a new manufacturing plant can take many years from start to finish, and so the nascent U.S. renaissance may take some time to reach full effect. In the meantime, investors may want to take notice, as the butterflies continue to flap their wings.

Learn more

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
Before investing in any mutual fund or exchange traded fund, you should consider its investment objective, risks, charges and expenses. Contact Fidelity for a prospectus, offering circular or, if available, a summary prospectus containing this information. Read it carefully.
Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
Past performance and dividend rates are historical and do not guarantee future results.
Investing involves risk, including risk of loss.
Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments.
Investing in stock involves risks, including the potential loss of principal.
Because of their narrow focus, investments in one sector tend to be more volatile than investments that diversify across many sectors and companies.
Indices are unmanaged. It is not possible to invest directly in an index.
1. Sector and industry returns, industry weights, and industry earnings throughout this article refer to returns, weights, and earnings within the MSCI U.S. IM Industrials 25/50 Index, an index designed to be broadly representative of industrials sector companies in the MSCI U.S. IMI 2500. In a 25/50 index, no single issuer exceeds 25% of the index weight, and the sum of all issuers with weights above 5% does not exceed 50% of the index weight. The MSCI U.S. IMI 2500 returned 14.0% year-to-date as of Jun. 30, 2013, while the MSCI U.S. Industrials 25/50 Index returned 14.6% over the same period.
2. Enterprise Value (EV) is the measure of a company’s market capitalization plus its debt, minority interest, and preferred shares, minus the cash and cash equivalents held. It is sometimes summarized as the amount required to acquire the company and pay all obligations. In sectors or industries with a wide variety of levels of debt, EV is often considered a useful way to compare companies.
Sectors and industries defined by Global Industry Classification Standards (GICS®).
Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
648038.4.0