An unsung hero in the economic recovery

A part of the Q4 2021 Market & Economic Insights series

Manufacturing has been a significant but overlooked contributor to the economic recovery. However, ongoing trade policy tensions between the U.S and China have put a strain on manufacturing globally. SVB Private Chief Investment Officer Shannon Saccocia considers the dynamics between recent manufacturing performance, existing trade agreements and insular economic policies abroad. Listen now.


Hello, and welcome to "Boston Private Perspectives." I'm Shannon Saccocia, chief investment officer of Boston Private, and I want to thank you first for joining me today. On today's podcast, I'm going to shift gears a bit from all the talk of the consumer and the Fed, and discuss instead one of the overlooked aspects of the economic recovery, which is the rise of manufacturing.

If we go backwards in time to prior to the pandemic, in 2018 and 2019, we were experiencing a significant disconnect between manufacturing and the consumer. In particular, we saw, particularly in 2019, a significant decline in areas such as new orders, export orders and output here in the United States. And a big part of that was based on the issues that we were having with China from a trade perspective.

To be fair, it wasn't just China. There was certainly tension with other trading partners outside of the United States. There had been several meaningful trade agreements that had been put in place by President Obama, which President Trump chose not to pursue. And we also were seeing what was, frankly, the perception that we were moving into a potentially higher-rate environment that would create a less supportive foundation, particularly for capital expenditures in heavy fixed asset businesses.

This was expected to be offset in large part by the 2017 Tax Cut and Jobs Act which essentially gave an earnings boost to many U.S. companies. But what we found was that the impact of the uncertainty of the trade war with China, which, as we've seen, has continued into President Biden's administration, weighed on the prospects for manufacturing globally, and not just here in the United States.

The arrival of a pre-pandemic contraction

So, despite the fact that there were some winners and losers in 2018 and 2019 from the China U.S. trade tensions, namely the European Union, there was continued deterioration, particularly in the second half of 2019, which led to a contraction in measures such as the ISM manufacturing index, which points to and tends to be fairly predictive of activity in the following 12 to 18 months.

And so at the end of 2019, prior to the pandemic, we were sitting at a PMI level, which was below the 50 mark, which typically is the line between expansion and contraction, there was significant uncertainty from U.S. CEOs as measured by the U.S. Conference Board's CEO Confidence Survey. And we had certainly seen pressure on prices in terms of inputs such as energy and industrial metals.

And what we've seen is that all of those factors and forces were compounded during the pandemic. So in March and April of last year, for instance, we experienced, not only a significant consumer contraction, but we also saw that contraction in the manufacturing economy as well. What was very different and what remains very different is the narrative around that contraction and that recovery in manufacturing and to the consumer.

Manufacturing sectors come to the rescue

So while it was anticipated that we would see renewed activity levels back to pre-pandemic levels for the consumer, what's been somewhat surprising has been the robust recovery in the manufacturing sectors. And that's essentially across the board, whether you're looking at new orders or export orders, whether you're looking at new capital expenditure spending. You certainly can point to the anticipated infrastructure build here in the United States, which would certainly translate to meaningful revenue and earnings increases for companies that would be part of the supply chain for some of those infrastructure projects.

And what's occurred has been a coincident recovery in commodities. We've talked a lot about inflation on this podcast, and in many ways, the inflation that we've been talking about has been at the end of the line, if you will, in terms of how consumer prices have been impacted. What has been the impact on the CPI? What has been the impact on the consumer basket? Because it's perceived that that's really what the Fed is focused on. And that's not inaccurate.

Producer prices are certainly part of the metrics that the Fed looks at in terms of how prices will impact the consumer in many cases. Because as input prices for producers rise, those costs typically are transmitted fairly quickly and efficiently in these markets to end consumers, whether their actual consumers are somewhere along the supply chain. And so the Fed is very cognizant of increases in producer prices.

But the view from many in the manufacturing sector globally is that there's likely pent-up demand from this contraction in 2018 and 2019. And so, it's not just the recovery from the pandemic and making up for the lost output of those several months in 2020, it's actually several years of likely under output into the production economy globally.

And so if you think about the potential tail for the manufacturing economy over the next several years, it would seem to support the fact that, while the consumer reopening and recovery can only go so far... I mean, frankly, we're already starting to see the impact of the savings rate declining under 10% the expiration of expanded unemployment benefits, and we're certainly not anticipating any additional stimulus checks.

Manufacturing may continue to bolster the economy

So at some point, some of that pent-up consumer demand is likely to dissipate. There's only so many vacations that that many of us can book. There's only so many purchases that perhaps we put on the sidelines for a, you know, a sunnier day. And with wages increasing but perhaps plateauing over the course of the next six to nine months as well, it's unlikely that the improvement in employment will continue to deliver the same benefits that it has. On the manufacturing side though, it would appear that the global economy, while moderating from the levels that we saw mid-year, is still very supportive of continued growth on the manufacturing side.

And this idea that we could see a protracted boom could be seen as both very positive, but also could create additional concerns about price increases such as the ones that we've seen in areas like copper. Now, compare this to what we experienced prior to the financial crisis. Although here in the United States, you know, 2008 and 2009 has really been marked by the collapse in the housing market, there was a second bubble that was in place that also burst, but slightly earlier than 2008. And that was the commodities bubble.

If we had been talking back in 2006, we would have been discussing, you know, the likelihood that oil was going to go to $200 a barrel and stay there just because of the sheer demand for commodities in that landscape. That was driven by an overabundance of Chinese infrastructure build and spend in an effort to drive growth in the Chinese economy.

That approach to spending in China, that build up in areas such as infrastructure prior to the financial crisis is not likely to be renewed, but there is some evidence that a second wave of spending or investment into the Chinese economy could be coming, perhaps not to the level that we may even see here in the United States with some of the infrastructure bills that are being considered currently in D.C., but there could be continued support for that spend. There also could be continued support for fiscal spend that could maintain this demand in the UK and the European Union. There has been some indication, particularly in Europe, on the continent, that fiscal spending to support projects that have a wider social good could receive support even from the most austere governments in Germany, for instance.

So our view or argument is that the rise in commodity prices from a year-over-year and month-over-month perspective is likely to abate. But there is justification that commodity prices could remain modestly higher than they were pre-pandemic because of the additional demand that we're seeing in the production side of the economy. And there are good reasons why that demand could continue. And so going back to the idea of the Fed and inflation, it comes down to how efficient will companies be able to be in balancing this new demand, in balancing the cost of their inputs and maintaining their profitability, and how much of that will continue to be transmitted to the consumer.

So despite the fact that we could see some moderation and leveling out in areas like food and energy, which are typically taken out of the core CPI but frankly are an important consideration for the Fed, this input inflation could prove to be the area that's not necessarily as transitory.

But I would argue that the benefits of a manufacturing expansion that has some legs to it over the course of the next couple of years, from a global GDP perspective and just from an overall economic perspective, could offset some of the negative impacts to the consumer basket, if it results in greater hiring, greater production and greater reinvestment in capital expenditure that was so sorely lacking, particularly in the U.S., over the last decade. And therefore, it might be a good trade-off, a valuable trade-off, a beneficial trade-off, if you will, to accept modestly higher prices in order to allow for this manufacturing expansion to continue, as I believe that it will have benefits that are much wider than perhaps are anticipated at this time in the cycle.

Developments in China may have negative economic impacts

The one risk that I'll leave you with, and one that we will continue to talk about over the course of the next several months, is the continued tensions with China. It has become very clear that President Biden, as we've discussed in several previous podcasts is taking a similar approach to the relationship with China that President Trump did. More importantly, however, the Chinese government appears very focused on maintaining the competitiveness of Chinese companies within China, but also a new approach in terms of righting the inequality that exists in the Chinese economy right now through an approach termed common prosperity, has created concerns about how companies outside of China can possibly operate in this new approach.

And so, any concerns about the Chinese economy and the robustness of growth in the Chinese economy, although not as much of a driver of the manufacturing expansion and commodity markets as perhaps in 2004 and 2005, could upset this narrative, and is certainly one that we will continue to watch as we think about the likelihood of the manufacturing expansion being a driver for higher than pre-pandemic growth in the global economy as we go forward.

Thanks again for listening to this week's podcast. I want to encourage all of you to reach out to our team here at Boston Private with any questions or concerns you may have. If you have any questions or thoughts on my points today, you can find me on Twitter @ShannonSaccocia. You can also read our latest perspectives on the markets, the economy, financial planning, and where we go from here by visiting

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