uploads///Housing Starts LT

The critical importance of cheap energy

By

Updated

The US manufacturing renaissance

For the past 30 years or so, the big stories in US manufacturing have been outsourcing and building overseas. Lower labor costs and the proximity of global technology in Asia, particularly in the semiconductor sector, have driven these phenomena.

Low value-added manufacturing had been leaving the US for quite some time. The trend began with textiles in the northeast and furniture in the southeast. Then, it branched out to technology. Most economists believed the US no longer had a comparative advantage in low value-added manufacturing, so it made sense for the US economy to focus on intellectual property and services.

Article continues below advertisement

Cheap energy is a game changer

Over time, wages have increased overseas. This is making the cheap labor arbitrage smaller and smaller. That being said, cheap energy in the US is a game changer for energy-intensive manufacturing, especially in the area of chemicals. The Fukushima nuclear accident revealed the vulnerability of extended supply lines. As a result, more and more manufacturers are deciding to build in (or return to) the US.

For the US economy, the return of manufacturing is an important development. It means that the middle class will have better opportunities than the ones offered by retail, which is the current go-to industry for those who lack extensive education. Manufacturing jobs typically pay much more than minimum wage.

Cheap energy also reduces the strategic importance of the Middle East. This means that more of the US budget can be shifted to other priorities.

Implications for homebuilders

For homebuilders, more US-based manufacturing jobs will bring about more of a need for affordable “starter” homes. Since the real estate bubble burst, most of the activity has been at the luxury end—think builders like Toll Brothers (TOL) and NVR (NVR). The affluent consumer benefited from quantitative easing, and the top end of the market really did not get hit as hard as the low end. Now, builders like D.R. Horton (DHI) and PulteGroup (PHM) are beginning to focus more on starter homes.

The manufacturing renaissance may also help boost housing starts from their current depressed levels to more normal historical averages. Anyone who wants to invest in the homebuilding sector should consider the SPDR S&P Homebuilders ETF (XHB).

Advertisement

More From Market Realist