Reindustrialization in USA - Euler Hermes

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Euler HermesEconomic Outlook n° 1187 | Special Report | The Reindustrialization of the United States• • • Continued from page 18“Even though these new Southern employerspay well below average for the U.S.automotive industry, they still pay wellabove average for manufacturing jobs in theSouth. The story is similar for other capitalintensiveindustries, such as aerospace andpharmaceutical manufacturing. Lookingbeyond the current business cycle, prospectsfor manufacturing in the South appearpromising. The transition to more advancedindustrial growth in countries such as Chinaand India is far from complete, so demandfor the South’s more advanced manufacturedgoods is likely to continue for some time. Newcapital investments should continue to reducecosts and increase productivity…”Jeffrey LackerThe Future of Manufacturing in the SouthTennessee, and Texas. In recent times these stateshave launched into bidding wars to attract automakers,offering generous tax breaks and subsidieswhich reduce the positive economic impact of newfactories.A major cornerstone to the continued comparativeadvantage of the Southern states in the reindustrializationprocess will be the development of the necessaryworkforce skills including more technical andvocational schooling rather than traditional four-yearcolleges. On the downside, it should be noted thatdurable goods manufacturing is particularly sensitiveto the business cycle. As a result, the recessionhit much of the South harder than the rest of thecountry, but it has also recovered somewhat faster.u The Southern export routes revisitedTotal U.S. exports have grown faster than the restof the economy in twelve of the past thirteen quarters.In 2011 when nominal GDP grew 4.0% over theentire year, exports grew 13.5%. And in the Southeast,the export growth rate was even stronger, over20%. According to the Federal Reserve, “Exportshave become an increasingly significant part of theregion’s economy. The Southeast’s globally interconnectedeconomy—with its fortuitous location andplentiful ports and coastline—is contributing to surging,if surprising, exports, such as the flood of internationaltravelers whose Southeastern expendituresconstitute a major export.” Commerce Departmentdata showing the top exports and their markets fromthe Southeast are listed in Table G. It would appearthat the Southern strength in auto manufacturing forthe domestic market has also contributed to strongexports for transportation equipment.u Finally, in 2014 a planned expansion of the PanamaCanal should be completed, allowing wider anddeeper vessels to transit the canal.Currently, most goods from Asia are unloaded at thecountry’s two largest ports, Los Angeles and LongBeach, and are then shipped by rail or truck to the restof the U.S. The expansion of the canal will establishan alternate competing route sending Asian goodsthrough the Panama Canal to U.S. ports closer tothe concentration of U.S. population. In preparation,southeastern ports such as Savannah, GA, Gulfport,MS, and New Orleans, LA, among others, have undertakenlarge-scale projects to upgrade their facilities.These preparations are likely to continue to boostmanufacturing in the South, while an increase inport activity from the new Panama Canal trade route,including both imports and exports, will contribute toeven more economic activity. ©G. Exports: Top Sector, Top DestinationsTop exports from the Southeast (2011)Transportation Equipment $31BChemicals $29BPetroleum & Coal Prods. $24BComputer and Electronic Prods. $23BAgricultural Prods. $21BTop export markets for the Southeast ( 2011)Canada $26BChina $17BMexico $17BBrazil $10BJapan $9B20Source: Department of Commerce
Economic Outlook n° 1187 | Special Report | The Reindustrialization of the United StatesEuler HermesThe (positive) double price effectin the short-runReason #2The gas bonanzau As shown below in Figure 18, net U.S. imports offoreign oil have been falling as domestic productionhas been increasing over the past several years. Asa result, imported oil, as a percentage of all oil producedand imported, dropped from a high of over68% in 2005 to 58% in 2012, in part because the priceof crude oil doubled over that same period. This dramaticshift will reduce America’s significant dependencerisk on foreign oil. It may also lead to lower costsand increased reindustrialization since, as shown inFigure 19, a glut of West Texas Intermediate (WTI)oil in the U.S. led to prices significantly below that ofthe global price of Brent crude.The energy factor has been particularly favorable to thereindustrialization of the U.S. and this trend should beconfirmed in the short run for two main factors. First, inspite of global oil price increases, and the subsequentstabilization at historical highs (expected to linger),U.S. domestic oil prices have been $15-$20 below theglobal price for almost two years. This has boosted therelative performance of U.S. companies, just as it hitthe operating profitability of foreign manufacturingand drove shipping costs up. Second, an abundanceof shale gas on the American market, resulting frommore intensive production has triggered downwardpressure on domestic gas prices and providedAmerican companies with access to a cheap energysupply. The main risks to this positive contribution are:• the effective potential of the shale gas reservesboth in terms of volume and usage for differentsectors of the economy; and• should prices continue to decrease, incentives forthe extractors (and their profitability) would fall,causing instability in the value chain.u In addition, prices for natural gas have plummeteddue to rapid developments in drilling technologiesincluding horizontal drilling and hydraulic fracturing,or “fracking.” Fracking is a technique in which water,sand and chemicals are injected thousands of feetbelow the surface under very high pressure to breakup rock formations, thereby releasing trapped naturalgas. These techniques have revealed dramaticamounts of new reserves over the past few years,particularly in the Marcellus shale which extendsfrom New York through Pennsylvania and into WestVirginia, and the Bakken shale in North Dakota andMontana. • • •18. U.S. Crude Oil Production and Net Imports000 bbl/mo19. Oil Prices$/bbl350000Domestic Net import productionNet imports150300000250000Production120BrentMar $125Oct$11020000090WTIMar$106Oct$901500006010000050000197274 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12Source: Department of Energy30Oct-07Jan-08Apr-08Jul-08Oct-07Jan-09Apr-09Jul-09Oct-09Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Source: World Bank21
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Reindustrialization in USA - Euler Hermes

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