Bright Future for U.S. Industry as We Move from Consumer to Industrial Economy

The New York Times’ “Conflicting Signals About the Chinese Economy” reports that Chinese exports fell 25.7% last month, yet China is still trying to stimulate its industrial economy. At the same time, Federal Reserve Chairman Bernanke is about to embark on a $1T program to expand consumer credit. American consumers are balking at both, while defiantly increasing their savings rate to a near term record 5%.

The coordinated world economic plan appears to be focused at the American consumer pulling all nations out of a near depression. But fundamental changes will prevent this from happening. First, as reported by The Wall Street Journal’s “Lean Factories Find It Hard to Cut Jobs Even in a Slump”, American factories are running so efficiently that foreign low cost labor is becoming far less relevant than factories being close to their customers.

Second, the cost of transportation and long lead times often outweigh labor savings. Third, consumer deleveraging is leading to less predictable consumer spending patterns. Factories will need to prepare for small runs, higher levels of customizations and unpredictable reorder patterns.

The long production cycle, just-in-time manufacturing model exemplified by Toyota (TM) is now dead. China just does not realize this yet. Local highly flexible manufacturing will replace the lethargic dinosaur logistics and sourcing that signifies the Chinese-Wal-Mart (WMT) model of today. How much longer can Macy’s (M) order 9 months in advance for Christmas?

What’s even more disturbing is that the Fed is depending on a narrow slice of consumers to restart our historic consumer economy. Just like I wrote in "Fed Pushes Housing into Stronger Hands", the Fed is now trying to push consumer credit into the strongest hands. The TALF program is seeking triple-A rated securitizations targeted at consumers with FICO scores exceeding 660. These are the more responsible consumers that are deleveraging now and strengthening their balance sheets. Making auto loans available to these consumers is like “pushing on a string.”

The whole focus of pushing money into strong hands to stimulate the economy is flawed. Alternatively, promoting investment into long-term flexible manufacturing assets might not stimulate the economy as fast. But, at least we will begin the difficult transition back to an industrial based economy. The service based economic model of the last few decades was merely a charade for foreign financed drunken consumer indulgence.

America’s future is extremely bright for industrial process and control manufacturers such as Eaton (ETN), Ingersoll-Rand (IR), Parker Hannifin (PH) and Rockwell Automation (ROK).

Disclosure: Author is long IR.

Comments

[ArtfulDodger:]

Would Foster Wheeler (FWLT) not fall into this group?

Mar 12 12:53 PM

[storm999:]

End of the mercantilist trade cycle -if only it could e true! It's a thought provoking article and like it. If it becomes possible for American manufacturers to use short turn around times and efficiency to beat Chinese (and other countries) virtual slave labor that would be great. Personally, I think that withing five years we will have a persistent trade deficit associated with mercantilist countries forcing down the values of their currencies- those who buy wheat, rice and oil in dollars, want to have a trade surplus with us. Loved the article though, gave me a completely different perspective.

Mar 12 07:13 PM

[Marcap:]

Excellent article, Michael.

Rebuilding a manufacturing base is the only way that any country can survive long term with any acceptable standard of living, unless of course it has unlimited resources and is 100% self-sufficient, which to the best of my knowledge, few if any countries in the world are.

When a country continues to import far more than it exports, as does the US, eventually its economy dies, and its wealth vanishes. And when that happens, the country becomes a debtor nation with very little hope of long term survival. The US sadly enough is currently headed down that road at a record pace, and I suspect that it will soon be too late to change direction.

When a country however exports more than it imports, it not only brings a surplus of money into the country, but it keeps its citizens employed, which in turn helps raise that country's standard of living.

Current stimulus programs unfortunately do not address these issues. Rather than being provided to new and/or expanding businesses which have shown viable plans and/or the ability to advance with new technologies and manufacturing processes, most of the stimulus dollars are being used simply as band aids to keep a few dying horses alive just a few days longer, relatively speaking. This will not solve America's problems.

On the contrary. Stimulus programs which only offer short term solutions, such as fixing an old bridge, or repaving a damaged road are only very short term solutions. Sure they will result in keeping more people employed for a few more months or even a couple of years longer in some cases, but for the long run, it will do nothing to save the economy. But rather quite the opposite, it will make it much worse, because once the band aids come off, the problems will still be there. Many will once again find themselves unemployed, and the country will be in debt at least 2 or 3 times more than it was before the first stimulus dollar was ever given out. For the most part, this is the what the current stimulus package will accomplish. In short, very little. America can no longer afford to send $700 Billion per year to the Middle East for oil.

The bottom line is that politicians must be made to listen, and listen now, or they must be removed from office. The long-term survival of the US as a significant player on the world stage greatly depends on this.

Mar 12 10:13 PM

[Marcap:]

It sure would. In fact Foster Wheeler is the very type of company that other companies would go to when they have a basic plan for a product, but need help with its design, construction, processing and training in order to make it happen. With a return to a manufacturing base, companies like Foster Wheeler should do quite well.

On Mar 12 12:53 PM ArtfulDodger wrote:

> Would Foster Wheeler (seekingalpha.com/symbo...) not fall
> into this group?

Mar 13 02:41 AM

[ClaireSolt:]

There are just a couple of fundamental fallacies promoting central planning here. The eonomy we all talk about doesn't exist, except in the statistics of econmetricians. They cannot measure or control it because it moves and adapts fast without them even knowing. Second, trde balances and imbalances are artificial constructs that place undue importance on imaginary borders. Countries do not trade. Individuals do. Finally, the fascination with manufacturing is in line with the general reactionary love of Marx, Darwin and the nineteenth century, but surely most economies in the history of man have not ben like thqt.

Mar 13 10:34 AM

[User 357469:]

Unfortunately it is the belief by many, in negative comments like yours, which has put us where we are.

On Mar 13 10:34 AM ClaireSolt wrote:

> There are just a couple of fundamental fallacies promoting central
> planning here. The eonomy we all talk about doesn't exist, except
> in the statistics of econmetricians. They cannot measure or control
> it because it moves and adapts fast without them even knowing. Second,
> trde balances and imbalances are artificial constructs that place
> undue importance on imaginary borders. Countries do not trade. Individuals
> do. Finally, the fascination with manufacturing is in line with the
> general reactionary love of Marx, Darwin and the nineteenth century,
> but surely most economies in the history of man have not ben like
> thqt.

Mar 13 11:53 AM

[ArtfulDodger:]

Thank you Marcap.

Mar 14 11:34 AM

[Marcap:]

You are very welcome. :)

On Mar 14 11:34 AM ArtfulDodger wrote:

> Thank you Marcap.

Mar 14 11:55 AM