FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 14, 2021

IN THIS ISSUE:

1. U.S. Manufacturing Is Rising & Should Continue

2. Ramping Up US Semiconductor Manufacturing

3. At Last, American Manufacturing Renaissance

4. The Emerging Productivity Boom In America

Overview – More “Made In The USA”

We’ve all experienced shortages of various goods and/or services in the last year or so of the coronavirus pandemic. In recent decades, American manufacturers have increasingly outsourced the production of goods we consume to foreign countries where they can often be produced cheaper.

Yet when COVID-19 shuttered many factories abroad, we soon began to experience shortages here at home in lots of products we regularly consume. The shortage of semiconductor chips alone, which are embedded in our televisions, phones, cars, and all other electronic devices, led to shortages of all these products in parts of America.

The problem is we don’t manufacture many semiconductors here at home anymore.

The semiconductor supply issue began in early 2020, and as we approach the final three months of 2021, it’s still plaguing the industry. Over three-fourths of semiconductor chips are currently made in Asia, mostly in China. The good news is this may be changing in coming months and years as I will discuss below.

And that’s not all the good news. US labor productivity more than quadrupled in the first quarter of this year from what it had averaged over the last decade, thanks in large part to AI and digital technologies advancing rapidly now.

Many experts believe the 2020s will see a renaissance in US manufacturing sectors in this and the years to come. Let’s jump right in.

U.S. Manufacturing Is Rising & Should Continue

Production at US factories surged in July (latest data available), boosted by an acceleration in motor vehicle output, despite the global semiconductor shortage. Manufacturing output jumped 1.4% last month, over double the amount expected by economists polled ahead of the report.

In July, production at auto plants soared 11.2%. The shortage of semiconductors has forced auto companies to adjust their production schedules. The Fed noted that “a number of vehicle manufacturers trimmed or canceled their typical July shutdowns,” when they typically retool their plants. Yet despite the surge, production of motor vehicles and parts in July was still about 3.5% below its recent peak in January 2021, the Fed said.

Overall manufacturing in July was 0.8% above its pre-pandemic level. Manufacturing, which accounts for nearly 12% of the US economy, is being underpinned by strong domestic demand. Yet that is straining the supply chain, leaving manufacturers struggling with shortages of raw materials and labor.

The increase in manufacturing output and a 1.2% rise in mining activity combined to boost industrial production by 0.9% in July. Mining was driven by higher oil prices, which are supporting drilling activity. Utilities output fell 2.1%.

Capacity utilization for the manufacturing sector, a measure of how fully firms are using their resources, increased 1.1 percentage points to 76.6% in July. Overall capacity use for the industrial sector rose 0.7 percentage point to 76.1%.

Officials at the U.S. central bank tend to look at capacity use measures for signals of how much “slack” remains in the economy — how far growth has room to run before it becomes inflationary.

Ramping Up US Semiconductor Manufacturing

To its credit, the Biden administration – like the Trump administration before it – recognizes the dangers of being overly dependent on foreign producers. As such, Biden has proposed $52 billion to assist the semiconductor industry in bringing more manufacturing “on shore.”

The federal government is smart to look at new ways to insulate the US from the pressure associated with having such a sensitive industry overseas. Not to overdramatize, but those who control the chips are effectively controlling the electronics. For national security reasons, we have every reason to want to ensure that these chips are made here at home.

This is why in January of 2021, Congress passed legislation within the National Defense Authorization Act which included provisions many hope will lead to more US production of semiconductors. The provisions include incentives to encourage the construction or modernization of facilities related to the “fabrication, assembly, testing, advanced packaging, or advanced research and development of semiconductors.”

Currently, the most sophisticated production of semiconductors, the five-nanometer node, is happening in Taiwan (TSMC) and in South Korea (Samsung). These countries are providing the chips for US-based tech giants like AMD, Facebook, Google, Nvidia, Qualcomm, and others. Historically, Intel had been the chip provider of choice for most American companies, but it has struggled to keep up with foreign competitors.

Meanwhile, the industry itself, as I mentioned, is smart to recognize the importance of onshoring this production because of the lost business opportunities associated with production and shipping delays.

At Last, An American Manufacturing Renaissance

If the government and the private industry could work together on this issue, then there could be a huge opportunity for a new kind of American manufacturing renaissance.

If we manufacture these technology components at home instead of abroad, then more Americans will be employed in high-skilled manufacturing jobs, profits will become more reliable for the companies in the supply chain that need these components and the US military might save a ton of money on its Southeast Asia operations. It’s potentially a win-win-win.

But Taiwan certainly isn’t taking any chances. Perhaps seeing the writing on the wall, Taiwan’s multibillion-dollar semiconductor giant TSMC plans to build a new semiconductor plant in Arizona. Reuters reported the company intends to invest $12 billion to build the plant. It says that long term it hopes to build up to six factories in the US over the next 10 to 15 years. This is good news for Arizona and the country.

It’s also good news for the tech companies which need these chips. Meanwhile, the renewed focus on technology is positive as well for the US-based semiconductor giant Intel and others. Plus, there’s an opportunity to redirect some of our military funding into projects that we need, to grow jobs at home and to ensure greater security in the technology we use every day.

The Emerging Productivity Boom In America

In addition to bringing some of our manufacturing home, let’s look at some impressive results recently in the area of worker productivity. Productivity growth, a key driver for higher living standards, averaged only a 1.3% annual increase since 2006, less than half the rate of the previous decade. 

Yet earlier this summer the Labor Department reported that US labor productivity increased by 5.4% (annual rate) in the first quarter of 2021. What’s better, there’s reason to believe this is not just a blip but rather a harbinger of better times ahead: a productivity surge that will match or surpass the boom times of the 1990s.

Researchers at MIT are very confident in their outlook for continued gains in productivity. In particular, they cite the fact that many developing countries are just passing the lowest point in a “productivity J-Curve.” Driven by advances in digital technologies, such as artificial intelligence, productivity growth is now headed up.

The productivity J-Curve describes the historical pattern of initially slow productivity growth after a breakthrough technology is introduced, followed years later by a sharp takeoff. Their research and that of others has found technology alone is rarely enough to create significant benefits.

Instead, technology investments must be combined with even larger investments in new business processes, skills and other types of intangible capital before breakthroughs as diverse as the steam engine or computers ultimately boost productivity.

For instance, after electricity was introduced to American factories, productivity was stagnant for more than two decades. It was only after managers reinvented their production lines using distributed machinery, a technique made possible by electricity, that productivity surged.

The MIT researchers believe there are two main reasons the productivity J-Curve will be bigger and faster this time around. The first is the fact there have been so many technological breakthroughs in the last decade. The second is the huge innovations in medical sciences and energy in recent years.

They conclude that when you have such powerful factors at work in an economy as strong as ours, then the key ingredients are in place for a continued productivity boom. Let’s hope so!

All the best,

Gary D. Halbert

SPECIAL ARTICLES

US Manufacturing Accelerated In July, Led By Autos

Can America Rebuild Its Chip Making Capabilities?

US In Midst of a Productivity Boom

Gary's Between the Lines blog: August Unemployment Report Was A Bust – Implications

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.