The Cost of American Industrial Revival

For a number of years investors have been used to the Unites States economy providing almost all of the global growth impetus and serving as a shelter in times of distress in Europe and the Emerging Markets. Abundant capital investment in traditional industries, prompted by low energy prices and the eroding competitive position of China, has triggered a form of U.S. industrial revival. We argue that this revival is temporary and will be followed by painful readjustment, and once again, much like in 2007, the U.S. market will become riskier than the rest of the world.
Cheap natural gas and oil prices in the U.S. combined with rising wages in China heralded the industrial rebirth in the United States during the last few years. Investment in fixed capital, which had collapsed during the great recession, recovered to more sustainable average cross-cycle levels by 2011. What was curious about this recovery, however, was the composition of industries contributing to the net additions to capital stock. While increases in investments in the services industries were still lower than the average over the previous decade, investments in traditional capital and energyintensive industries recovered sharply (Figure 2). Industries like textile, metal fabrication, wood, leather, construction saw fixed asset investments grow at a rate of more than 15% over the decade average, while traditionally growing capex industries saw their investment numbers below average, albeit still significant contributors to the capex growth.