"Made in the USA" Makes a Comeback

Wells Capital Management strategist Jim Paulsen says shifting currency values tilt the balance in favor of U.S. producers.

Whether it was General Motors’ cars or Procter & Gamble’s diapers, most products Americans bought through the late 1970s were made in the USA. From the end of World War II, manufacturing erupted into a major propellant of the U.S. economy. But as emerging economies started to manufacture products with cheaper labor, manufacturing moved from the U.S. to places such as China -- and so did many of the manufacturing jobs. A strong U.S. dollar didn’t help. Since the late 1970s, the manufacturing industry has been largely in decline. Until now.

Since the Great Recession ended, an increase in exports has helped fuel our economy’s recovery. But is this resurgence a short-term trend or the end of a decades-long decline? For insight, we spoke with Jim Paulsen, an economist and chief investment strategist of Wells Capital Management in Minneapolis, Minn ., who has been outspoken about manufacturing’s revival for some time. Here are some edited excerpts from our conversation.

KIPLINGER: After decades of lagging, the manufacturing sector seems to be on its way back. Is this the beginning of a longer renaissance?

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PAULSEN: Yes. The manufacturing sector is leading this recovery for the first time since the 1970s and, despite recent short-term turmoil, I think it’s sustainable. The U.S. manufacturing sector is becoming more competitive again globally.

What makes the manufacturing sector more competitive now?

Two tough decades have forced manufacturers to cut costs and improve productivity, and they’re squeezing out more profit per job than at any time since World War II. In the last decade, virtually no new manufacturing plants were added and the number of manufacturing jobs has fallen from an average of around 18 million in the early 2000s to 12 million jobs now. It also helps that the gap between Chinese wages and U.S. wages is beginning to narrow as Chinese wages rise.

How does a weaker dollar help?

As the Chinese allow their currency to appreciate against the U.S. dollar, and other emerging markets allow their currencies to appreciate as well, the dollar is likely to continue a slow but steady decline against emerging world currencies over the next couple of decades. As emerging markets’ currencies appreciate, their economies will shift from exports toward consumption. The big prize for U.S. manufacturers will be winning new emerging-world consumers.

What does this trend mean for outsourcing?

You’ll see less outsourcing. As we become more competitive with emerging producers, companies will start building more factories in the U.S. than overseas. We won’t regain all of what we used to make, such as apparel or electronics. It’s more likely we’ll produce new things -- something we don’t even know yet. And we’ll regain leadership by using new manufacturing processes.

Will this mean more manufacturing jobs created?

Yes, we’ll see more jobs from the manufacturing sector than we have for decades. Wages will rise, too. But there’s not much of a trained workforce. We’re going to need more scientists and engineers in manufacturing.

What does this trend mean for consumers?

There is a chance that prices of goods may climb. But if we revive manufacturing, we may start to bring more blue-collar manufacturing workers back into the middle class and close the income gap that has been widening between the wealthy and the rest of the population. Selling goods to younger consumers in emerging markets also means more economic growth domestically and therefore jobs, which will help finance some Social Security and other programs consumers depend on.

President Obama wants to double exports over the next five years. Is that goal achievable?

Yes. But doubling exports isn’t the only key. The problem is also that our imports need to grow much more slowly. We have to sell to Chinese consumers, sure. But we also have to get U.S. consumers to buy U.S. As wages go up in developed markets and as the dollar weakens against those emerging market currencies, that can occur.

Are there investment opportunities?

Yes. Invest in stocks of materials and industrial companies. [We like Baker Hughes (BHI) and Caterpillar (CAT). For more, see 2011 Midyear Outlook: Stocks and the Economy Face Off.] The whole manufacturing sector is lean and mean -- because if you weren’t you’re gone. That means as demand picks up, profits will grow more quickly.

Do prices of manufacturing stocks have room to run?

Yes. In the early 1990s. the materials and industrial sectors together made up almost 20% of the market value of Standard & Poor’s 500-stock index. If you go back to the 1960s, it might have been closer to 50%. Today they make up only about 14%. If there’s just a little bit of recognition that investors want some exposure to the manufacturing industry, it could push the values of manufacturing stocks a lot higher.

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Jennifer Schonberger
Staff Writer, Kiplinger's Personal Finance