One of the more popular pitches President Trump made on the campaign trail was about saving American jobs. Specifically, that he has promised to bring back American manufacturing jobs, which have migrated overseas, particularly emerging Asian economies. Even though the United States is still the world’s second largest manufacturer in dollar output terms, it does so with less and less human capital as a factor of production. So, does the market really care about U.S. manufacturing sector?
Losing manufacturing jobs is not a bad thing. Technological innovations have evolved manufacturers into more efficient and profitable operations. Also, when displaced, it forces workers to develop new trade and vocational skills in other human capital intensive industries, like healthcare – where demand is set to increase with an aging population. The U.S. manufacturing industry employed 12.4 million people in March 2017, which means only 8.4% of the total U.S. labor force works in manufacturing. That’s down from 22% in 1977. The broad trend is clear. Fighting for more U.S. manufacturing jobs is not only illogical, it’s counterproductive.
During 2016, the U.S. exported $1,051 billion in manufactured goods and imported $1,920 billion, resulting in a manufacturing goods deficit of $868 billion. The largest exports were transportation equipment ($252B), Chemicals ($174B), Computers and Electronic Products ($116B) and “Machinery-Except Electrical” ($109B). Reducing this trade deficit has been another area of President Trump’s repeated messaging. With the possibility of better trade deals, this deficit could narrow somewhat.
If we look back to May 2007, both the Institute for Supply Management’s Manufacturing Production Index (ISM) and S&P 500 (using SPDR S&P 500 ETF, as a proxy) were nearly perfect correlation pre-recession until March 2009 (chart above). During the 2007-’09 time period, the ISM had fallen -53.9% while the S&P 500 had fallen -52.9%. It makes sense that these two would follow each other so closely on the way down. But what about post-recession? Do markets really care about this traditionally referenced economic indicator?
Since ISM and S&P 500 indexes had hit rock-bottom in Mar/Apr 2009, manufacturing roared back above pre-recession levels within months. US stock prices, however, did not get back to pre-recession levels until years later, around March 2013. And since then, stocks haven’t looked back, soaring to new heights, while manufacturing has continued to be more or less sideways since its post-recession rebound.
Figures just released this week from April 2017 ISM data show that manufacturing is little changed from a decade ago (up just over 1%), whilst US stocks prices are more than 55% higher. What this means is that there’s been a fundamental correlation breakdown of key economic data to U.S. stock prices. When this happens, investors can find themselves in no man’s land, looking to the future for fulfilled promises to justify today’s record stock prices. For now, I’m still expecting at least some of those promises (particularly, tax reform and deregulation) to be realized.