Thought of the Week

1. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
Thought for the Week (277):
U.S. Manufacturing - The Unsung Hero
Synopsis
 The data suggest that the U.S. has experienced a rise in exports since 2005, and we feel that this is just the beginning of a long secular trend to bring manufacturing back to the U.S.
 The main driver of resurgence in domestic manufacturing has been the significant cost advantage for facilities and plants located in the U.S. vs. other developed export economies.
 The net result of this trend is a material decrease in unemployment, rising consumer spending, and stronger economic growth which further supports our secular bull market thesis for equities.
Export Manufacturing
The U.S. trade deficit has been a topic of much discussion over the past two decades given the potentially negative ramifications of maintaining a deficit for too long.
A trade deficit occurs when a country imports more than it exports, and several market pundits and economists believe that an economy can be negatively affected if a deficit persists for too long (although there is no real conclusive evidence to support such a claim).
Despite all the public focus on our trade deficit, next to no attention has been given to the fact that our exports have been growing more than seven times faster than our gross domestic product (GDP), a measure of economic growth, since 2005.
Furthermore, as a share of the U.S. economy, exports are at their highest point in 50 years, and companies from large multinationals like Ford and NCR to smaller U.S. makers of everyday products have begun to reverse the four decade long migration of outsourcing jobs to low-cost economies.
We believe that the trend of bringing manufacturing back to the U.S. is just the beginning, and if this trend does continue, then the implications are critical for long-term investors. However, before we discuss why investors could benefit from this movement, let’s first explain why manufacturing jobs are back.
Cost Advantages
The U.S. is steadily becoming one of the lowest-cost countries for manufacturing in the developed world. A report by The Boston Consulting Group (BCG) recently estimated that by 2015, average manufacturing costs in the five major advanced export economies – Germany, Japan, Italy, France, and the U.K. – will be 8 to 18 percent higher than in the U.S.
There are four components to our growing cost advantage:
1. Labor: The labor market in the U.S. is currently more attractive than that of all other major export economies, particularly when adjusted for output-per-worker. Additionally, U.S. regulation allows companies greater flexibility to adjust workforce size in response to business conditions, and wage inflation in China has reversed the trend from offshoring jobs to now “reshoring” them back.
2. Energy: Rapid technological advances in extracting natural gas and oil have unlocked vast amounts of energy that could make the U.S. energy independent within the next decade. Natural

2. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
gas costs anywhere from 2.6 to 3.8 times higher in Europe and Japan than in the U.S., which is a key input cost for chemicals and plastics.
3. Electricity: Cheap natural gas will also contribute to lower electricity costs as more gas-fired plants produce our nation’s electricity. Industrial electricity prices are currently 61% higher in France, 92% higher in the U.K., 107% higher in Germany, 135% higher in Japan, and 287% higher in Italy. Energy intensive industries such as metals and paper will continue to benefit.
4. Shipping Rates: Since the U.S. has been a net importer for so long, freight costs leaving the U.S. are at very low levels (a ship arrives with goods that we import but leaves empty as we export far less has lowered shipping rates over the years). These low rates provide a material cost advantage for companies producing goods here in the U.S. to be shipped elsewhere.
The net result of these cost advantages can be seen below in a chart showing average projected manufacturing cost structures of the major export nations relative to the U.S. in 2015.
NOTE: China appears to be lower than the U.S., however, we would argue that the differential between the U.S. and China is not large enough to warrant the logistical, shipping, and managerial challenges of offshoring manufacturing vs. several years ago when this gap was much wider.
The bottom line is that the U.S. now has a distinct cost advantage compared with other developed export economies, and lower costs not only benefit companies located here but also entice even more global organizations to move facilities and operations to the U.S.

3. This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion or our investment managers
at the time of writing. Nothing in the commentary should be construed as a solicitation to buy or sell securities. Past performance is no
indication of future performance. Liquid securities, such as those held within DIAS portfolios, can fall in value. Global Financial Private
Capital is an SEC Registered Investment Adviser.
Implications for Our Economy
Three quarters of global manufacturing exports are concentrated in seven industrial categories shown below. We feel that the cost advantages, in addition to higher worker productivity, well positions the U.S. to take export volume away from other developed economies in each of these categories.
BCG further estimates that higher exports, combined with production work likely “reshored” back from China, could create 2.5 million to 5 million American factory and service jobs. An increase of this magnitude could lower our unemployment rate by 2-3% by the end of the decade.
Jobs are so important to our economy because as more Americans achieve steady employment, they become more confident and ultimately spend more money. Consumer spending accounts for 70% of our GDP, so confidence is critical for our economic health.
The bottom line is that an economy fueled by cost advantages, rising employment, and a reduction in the trade deficit as we continue to export more every year, bodes well for a robust equity market. Therefore, we view export manufacturing as a key component to our secular bull market thesis, and we will continue to search the equity markets for ways to profit from this trend.