Hugh Grieves
Premier Miton US Opportunities Fund manager
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Home of the Rustbelt
Today Cleveland, Ohio is best known to Americans for being home to the ‘Rock and Roll Hall of Fame’ museum and several successful sports teams including the Cleveland Cavaliers (basketball) and the Cleveland Guardians (baseball). But the city has also been synonymous with the decline of manufacturing and the emergence of the American rustbelt; a group of mostly Northern and Eastern American cities that grew as the country rapidly industrialised at the end of the nineteenth and early twentieth centuries before shrinking as heavy industries such as steel and chemicals moved away, mostly to the Far East. The population of metropolitan Cleveland has halved since its peak in 1950.
The consensus has been that Cleveland is a post-industrial city destined to perpetual decline. Walking around the city, the grand but faded buildings are a cheerless reminder of its industrial heyday long ago.
But something is changing
There are cranes hovering over several shiny new buildings that are being constructed downtown, and ambitious plans to rejuvenate the waterside area that abuts Lake Erie, the smallest of the Great Lakes that forms part of the border with Canada. In part, this city renaissance is being propelled by the regeneration of its original foundation, American manufacturing industry.
To enable the country to better compete with China, the Biden administration has provided generous incentives, to the irritation of many in Europe, driving a wave of investment and a boom in factory-building. In addition to the financial motivations to build at home, US corporate leaders have other concerns; the Covid pandemic exposed the fragility of elongated global supply chains, and Russia’s invasion of Ukraine has led companies to re-examine their dependence on China given Taiwan’s vulnerability.
The offshoring to reshoring tidal shift
‘Reshoring’ as it has been termed, reversing years of manufacturing being moved overseas or ‘offshoring’, is now visibly happening. Over just the last twelve months, monthly construction spending by manufacturers has more than doubled to almost a $190bn annualised rate in April. One of the biggest individual examples in the entire country is just down the road from Cleveland, in Columbus. Intel’s ‘Ohio One’ project is a $20bn investment to build a vast new factory complex that will produce leading edge semiconductors, reducing the country’s dependence on imported chips.
Annualised monthly spending on manufacturing construction (2022 US dollars)
Source: Bloomberg data from 31.01.2002 to 30.04.2023.
The investment value in talking a walk
This boom in investment, and all its spinoff benefits, is a significant near-term tailwind for the local economy, as well as a longer-term boost to the competitiveness of the US economy and its companies. One of the biggest problems though, for companies building these new factories, is finding the employees to work in them. With the national unemployment rate close to the lowest levels seen since the 1960’s, and with almost two open job vacancies for each available worker, US workers find themselves in a strong position to demand higher, inflation-busting wages. In fact, the strength of the labour market, and consumer spending in general, has been the big surprise to the stock market since the Federal Reserve started raising interest rates last year. It had been widely expected that unemployment would rise sharply as higher interest rates stifled economic activity, so bringing down the upward pressure on prices.
Instead, unemployment has remained relatively unchanged, but inflation has started falling anyway. The economy has continued to expand rather than falling into the widely forecast recession, stubbornly predicted for so long by so many Wall Street economists. Rather a recession continues to be persistently ‘just around the corner’ but never quite arriving.
Like the US economy, everybody once wrote off Cleveland. But now the city is challenging those widely held preconceptions and starting to shake off its rustbelt image, proving the naysayers and sceptics mistaken. Perhaps Wall Street economists should walk the city streets too. It is a helpful reminder that just because something has become a widely held assumption, it does not mean it always has to be right.
