Can the U.S. emerge as the next economic growth story? 5/10/13

There are two major developments in the U.S. that could prove to be “game changing” in the global economy.  The first is U.S. energy exploration and the second is manufacturing investments returning to the U.S.

U.S. Energy Exploration:

For decades, the geopolitical leverage achieved by Mid East Countries (OPEC) has been a major challenge for the U.S. and its allies. Now, the growth of oil and natural-gas production from unconventional shale resources in North America is rapidly eliminating this threat, with positive geopolitical implications for the U.S. As political uncertainty continues across the Middle East, rising U.S. shale-oil production may become a more critical touchstone to market stability. In fact, the U.S. natural gas and oil boom could provide a significant boost to economic growth in the U.S.

Another advantage of energy security is that it would provide a buffer from Middle East political uncertainty.  Washington will have more discretion to use the Strategic Petroleum Reserve to help allies in times of crisis or to prevent oil producers from using energy cutoffs to achieve financial or geopolitical goals. U.S. oil and gas exports will also garner closer ties to allies and friendly countries through closer economic relations.

The domestic oil and gas boom could bring the U.S. back to a stronger economic footing, possibly returning the financial leverage that previously allowed it greater influence on international organizations like the United Nations and the World Bank. U.S. foreign aid and even energy exports could become a stronger counterpoint to continuing Chinese currency and intellectual property rights issues.

China may also soon find that its overt policies of aiding problem states like Iran and Syria will become more and more counterproductive over time.  Tying up the U.S. in conflicts across the Middle East and the resulting rising energy costs would hit oil-import dependent China harder than an energy self-sufficient America.   These dynamics are hard to predict but it is certainly a scenario that just ten years ago seemed impossible.  The fact that the U.S. is quickly becoming one of the world’s biggest producers of energy could be a positive catalyst for future economic growth and stability in energy prices in the U.S.

According to the International Energy Agency in its World Energy Outlook 2012, the extraordinary growth in oil and natural gas in the U.S. is a “sea-change in global energy flows”. By around 2020, the United States is projected to become the largest global oil producer and starts to see the impact of new fuel-efficiency measures in transport. The result is a continued fall in U.S. oil imports, to the extent that North America becomes a net oil exporter around 2030.

For energy-intensive industries such as chemicals, steel and paper manufacturers as well as industrial gas suppliers and nitrogen-based fertilizer producers the low price of gas and the subsequent easing of the price of crude oil is a positive trend that will help them keep costs down and drive earnings higher.  The shale gas revolution has just been started and the big winners are going to be U.S. companies and U.S. consumers.  The revolution could drive economic growth which will lead to more U.S. jobs.

Manufacturing investment returning to U.S.:

“Made in America” could be on many more of the products we purchase in the near future.  As the article below highlights, more and more companies are opting for manufacturing here in the U.S.  In the last few years, Caterpillar, Ford, and Apple have all committed to moving some manufacturing jobs from overseas back to the U.S.  The companies are not simply moving jobs back to the U.S. to gain good PR or out of a sense of patriotism; rather, they are moving jobs here, because, for the first time in a while, it makes business sense to do so.  While labor costs in the U.S. haven’t changed much in the last few years, China’s labor costs have been rising by an average of 15% annually, and are expected to rise 15-20% in the coming years.  Many of the companies that relocated their manufacturing to China have yet to see the return on investment.  While it is cheaper to manufacture there now, increasing labor costs, safety concerns, and shipping costs as well as increasing difficulties doing business in China have left some companies looking back to the U.S.  The graphic below demonstrates this change in American businesses viewpoint.

The trend is not just at the expense of China, however.  Caterpillar announced plans to bring jobs back home from Japan. Caterpillar’s move should create 3,200 jobs in Georgia once the plant is up and running.  The company cited “proximity to major ports” as the reason for the relocation.   Ford announced that it will bring jobs back to the U.S. from Mexico.  In fact, the Kansas City Plant is poised to receive 2,000 new jobs.  Finally, Apple announced last year that Macs will be made in the U.S. for the first time in several years.

As we have noted before, U.S. companies are leaner and more cost conscious than ever before.  Our expectation is that these two “game changers” will not only add quality jobs to the U.S., but is simply the beginning of a larger overall trend.