The current performance of the U.S. stock market and economy has fallen into a puzzle. The U.S. officials said recently that the U.S. economic performance is healthy and good.
The U.S. CPI data in June was up 3% year-on-year. The CPI in July increased slightly by 3.2% year-on-year. Therefore, some Fed officials said that although the U.S. has raised interest rates significantly in the past 16 months, the U.S. may still achieve a soft economic landing. As a result, some U.S. analysts who were previously pessimistic about the U.S. economy and believed that the U.S. would fall into economic recession this year or early next year have changed their views and reduced the probability of U.S. economic recession. And the S&P 500 index in the U.S. has risen by about 16.7% so far this year. The increase would have been even higher if the stock market had not fallen last week.
However, according to Yang Feng's observation, the U.S. stock weakness last week may not be a good sign, somewhat similar to the U.S. stock decline in January last year. In early January last year, the three major U.S. stock indexes fell sharply from their historic highs, and eventually all fell below 20% in September, entering bear market territory. So, will the U.S. economy fall into recession or achieve a soft landing and healthy growth?
1 U.S. reindustrialization
Some people in the U.S. have raised an argument: "A super cycle of U.S. manufacturing investment is unfolding." This graph shows U.S. manufacturing construction spending over the past 20 years, which is data from the U.S. Census Bureau.
As can be seen from the chart, manufacturing investment and construction spending in the U.S. have increased significantly since 2022, nearly doubling. What is going on here? Recall that after former U.S. President Obama took office in 2009, he declared that he wanted to rebuild U.S. manufacturing. But after Obama talked and promoted for a long time, he was still unable to drive the return of U.S. manufacturing. Obama had asked Tim Cook, then CEO of Apple, to move Apple's supply chain from Asia back to the U.S. Cook replied that it was impossible, that the huge supply chains could not be moved back to the U.S., and that the U.S. did not have the capability for a full mobile phone industry chain.
So why has U.S. investment and construction in manufacturing surged in the past year or so?
This has to trace back to several supply chain plans that the Biden administration has been pushing since taking office in 2021, including chips, electric vehicle batteries, rare earth supply chains, pharmaceutical supply chains, and the outbreak of the Russia-Ukraine war in February 2022. In August 2022, the U.S. passed the CHIPS and Science Act and the Inflation Reduction Act, which provide substantial subsidies for manufacturers in the U.S. and its allies to invest and build factories in the U.S. There are two focuses: one is chips, the other is pure electric vehicle batteries. In addition, the Russia-Ukraine war has driven up energy prices in Europe. U.S. European allies are suffering from high inflation and energy crises. Some European manufacturers, steel, fertilizer and other companies are shifting production lines to the U.S. Take Germany as an example. According to German newspaper Handelsblatt, just last fall, more than 60 German companies were attracted to invest and expand business in Oklahoma, U.S. alone.
Dutch fertilizer company OCI sharply reduced ammonia production in Europe and invested hundreds of millions of dollars to expand its plant in Beaumont, Texas. The global steel giant ArcelorMittal also announced that it would cut production at two of its plants in Germany by half and plans to expand its business in Texas. In response to this phenomenon, U.S. media said: "This is the beginning of the reindustrialization and economic recovery of the United States. U.S. manufacturing is experiencing a rebound, manufacturing jobs are booming, just like in the 1970s." In addition, the U.S. has also passed the bipartisan infrastructure bill, which is its own infrastructure plan.
To summarize this information, the Biden administration's overall approach is:
first, the U.S. has its own infrastructure plan, to strengthen investment in U.S. infrastructure. In this regard, it can also be said to emulate China, aligning with China's infrastructure plans. This is investment using domestic U.S. funds.
Second, through investment subsidies for chips, pure electric vehicle batteries and solar cells, in addition to domestic corporate investment, it also attracts foreign allied companies to invest in the U.S.
This move by the U.S. is actually quite powerful and also very ruthless.
The U.S. uses both soft and hard methods to get allied companies to invest in the U.S. The so-called soft approach is to use the subsidy funds in the bill to attract foreign companies to build factories in the U.S. To put it simply, if providing $100 billion in subsidy funds can bring in $1 trillion in foreign investment, this is a very cost-effective approach.
In addition, the Biden administration is also trying to convince allies that building factories in the U.S. can access the huge domestic market in the U.S.
Of course, the Biden administration has also not hesitated to use hard approaches, which operate on two levels.
For example, using various commercial divide-and-conquer and price bargaining tactics. For example, if Samsung does not build a wafer fab in the U.S., the subsidies will be given to Samsung's competitor TSMC instead. Or if they don't build factories in the U.S., they won't get subsidy funds from the U.S. government, which will drive up costs and lose competitiveness in the U.S. market.
The second level is to take advantage of mutual defense treaties between the two countries, as well as the U.S.' upstream technologies and patents in some technological fields, to intimidate allied companies into investing in the U.S. Of course, if these foreign companies are "unappreciative" and don't drink the toast, the U.S. can leverage military protection, arms sales, upstream technologies and patents to threaten them, and even close the U.S. market to them. These are all "tools" in the so-called "toolbox" of the U.S.
For example, in September 2021, when the U.S. convened the global semiconductor summit again, U.S. Commerce Secretary Raimondo demanded that TSMC, Samsung and Japanese chipmakers hand over confidential business data at the meeting. Otherwise, the U.S. would open its toolbox to "serve" them.
2. Reindustrialization while standing on allies' heads
Third, through the cycle of U.S. dollar rate hikes, forcibly attract overseas funds to invest in the U.S., which also includes the Russia-Ukraine war factor.
These three approaches by the Biden administration, except for the infrastructure program, can be simply described as attracting investment through interest rate differentials plus subsidies, while pushing investment through overseas wars and turmoil, creating a safe haven effect.
Coupled with the hard measures at the two levels mentioned earlier, it forces or motivates foreign companies to invest in the U.S. These three approaches and two levels of hard measures are quite capable and ruthless by the Biden administration.
However, those affected are almost all U.S. allies. The U.S. wants to reindustrialize while standing on the heads of its allies. Will this model work?
3. Biden loudly proclaims: U.S. manufacturing is back
In December 2022, at the machine installation ceremony for TSMC's wafer fab in Arizona, Biden loudly proclaimed: "U.S. manufacturing is back."
For the U.S., regardless of what means were used, the fact is that TSMC did come to build factories in the U.S. Therefore, Biden can loudly declare that U.S. manufacturing has returned.
Has it been effective? At least in the short term, it can help the Biden administration resolve some difficulties.
First, increase employment. When these manufacturers invest and build factories in the U.S., it will bring job opportunities for the U.S. initially, such as during the construction period and initial operation of the factories. In 2022, the U.S. construction industry added 192,000 jobs. When these funds flow into the U.S., there will naturally be some effect.
Second, slow down the possibility of economic recession. Since March 2022, the Fed has undergone 12 meetings and 11 rate hikes, bringing the federal funds rate up to a range of 5.25%-5.5%. Such high interest rates will of course hurt the real estate industry in the U.S. However, it is because of these manufacturing investments that not only have they brought 192,000 jobs to the U.S., but they have also contributed to U.S. economic growth.
Next, it remains to be seen whether these manufacturing investments can continue in a healthy, long-term manner. If so, then long-term effects will be achieved, continuing to provide job opportunities for the U.S. and drive U.S. economic growth.
4. This cycle is different from previous ones in the U.S.
This brings us to the next topic, has the U.S. really entered a super cycle of manufacturing and is now in an early stage? How will future developments unfold?
Our viewpoint is that the U.S. has an opportunity, but the risks are higher.
This brings us back to the three approaches and two levels of hard measures used by the Biden administration mentioned earlier. The U.S. was once the world's largest manufacturing powerhouse. In the last century, the U.S. surpassed the UK's national power because of the U.S.' industrial strength and industrial output exceeding that of the UK. China's industrial output did not surpass the U.S. until 2010, when the U.S.' position as the number one manufacturing power was replaced by China.
However, before that, the U.S. sat firmly on the throne of the world's number one industrial powerhouse for 116 years.
At this point, we should compare the U.S.' current so-called reindustrialization with its previous position as the world's number one industrial powerhouse to see what the differences are. In short, the U.S.' previous position as the first industrial power was spontaneous and endogenous. Whereas the current so-called reindustrialization still relies on hard measures at two levels, a semi-coercive approach, and even runs counter to economic principles and market rules.
5. Violates economics and market principles
This is like the cultivated power absorbed through evil arts—ultimately unable to be freely utilized and perfectly successful within the body. The ultimate goal of investing and building factories is to sell the products produced, which means sales from production.
Where are the sales? The U.S. market is only so big, yet it excludes the Chinese market, which is equal in size to the U.S. market. This does not conform to the economic laws of investing and building factories.
For example, in the past two years, many new wafer fabs for chip manufacturing have indeed been set up in the U.S. But who will these huge production capacities be sold to in a few years if the Chinese market is excluded? Isn't this approach similar to the industrial system during the Soviet era last century? Huge production capacity yet no market planning will ultimately lead to waste and idle equipment.
The U.S. claims to have a market economy and a free economy. It is understandable to incorporate some elements of a planned economy and government guidance now. But overinvestment without end-market sales is a sword hanging over one’s head. We may see this phenomenon in a few years.
Just as with the global chip shortage in 2021, the chip shortage at that time gave many countries' manufacturing industries headaches. So some of the world's major chip companies immediately expanded production capacity. The result was that the following year, it immediately turned from a chip shortage to chip oversupply and overcapacity, and major chip companies worldwide began cutting production.
Economics cannot be separated from market analysis, and manufacturing cannot be separated from market sales. One cannot close the door and engage in manufacturing. In the end, it may lead to overproduction and poor sales.
6. U.S. treats symptoms but not root causes
The Biden administration has achieved today's results through three approaches and two hard measures, which is no easy feat. However, some fundamental problems remain unresolved, such as union issues. This is like treating the symptoms but not the root cause.
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Why did the U.S. lose its status as a manufacturing powerhouse in the first place? Apart from the U.S. over-tilt toward the service industry, it ultimately boils down to competitiveness. U.S. manufacturing could not compete with China. Therefore, even if manufacturing is forcibly revived now through some means without corresponding improvement in competitiveness, the result will still be that in a few years, competitiveness will still be weaker than China's, unless China's competitiveness declines.
To improve competitiveness and the manufacturing environment, it is crucial to address the root causes and start from the fundamentals, rather than treat the symptoms but not the root cause as it is now.
7. Conclusion
The Biden administration has indeed expanded manufacturing investment and increased some job opportunities and economic growth through various means and measures over the past two years. The U.S. manufacturing investment wave is expected to continue for another 2-3 years.
But ultimately, the issue of market competition will still need to be faced, and that will be the real test.
If the U.S. does not think about improving the manufacturing environment and seek to expand the market, but still chooses to exclude the Chinese market, these increased manufacturing investments may fall at the feet of the so-called market economy that the U.S. previously claimed. Then, the phenomenon in recent years may just be a flash in the pan, ultimately resulting in wasteful investment and idle equipment.
After all, the ultimate test faced is the issue of "competitiveness." This is precisely what China is currently doing and will continue to work hard on: continuously strengthening infrastructure, improving the manufacturing environment, reducing overall costs, thereby enhancing overall manufacturing competitiveness.
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