CIO continues to see an opportunity in US infrastructure, which should benefit some of the same companies tied to reshoring. (UBS)

Last summer, CIO outlined the opportunity in US infrastructure and reshoring in thier report, " Made in America. " About seven months later, the economic data continue to support the thesis, albeit with a few fits and starts.


Investment in nonresidential structures, an imperfect proxy for factories, grew 12.7% in 2023, and manufacturing construction surged, ending the year up 70.6%. While the growth rate is expected to normalize, the reshoring trend still looks well supported. Private companies have announced an estimated USD 642bn in US manufacturing investment over the last three years. Unfortunately, talk is cheap. The hard part will be executing these ambitious plans, and challenges are already emerging. This doesn’t mean the “Made in America” effort is at a dead end, but the path forward will be bumpy. We continue to see an opportunity in US infrastructure, which should benefit some of the same companies tied to reshoring.


Our take on project delays


Economic theory is not the impetus for reshoring—the incentive to reshore is instead rooted in national security concerns. Economics 101 would indicate reshoring is expensive and inefficient, and indeed it is. High costs and significant labor constraints have been blamed for major project delays, particularly for new semiconductor facilities. This isn’t surprising. As anyone who has remodeled their kitchen before can probably attest to, things often take longer and cost more than estimated. Over time, we think the manufacturing shift toward regions with less abundant and higher-cost labor should ultimately bode well for automation and energy-efficiency solutions, but many automation providers are still being bogged down by the post-pandemic normalization of supply chain, inventories, and underlying demand.


Policy uncertainty adds another headwind. As it stands today, the domestic manufacturing tax credit does not restrict foreign companies from capturing it. This means new factories manufacturing “American-made” products don’t need to be owned and operated by an American company to benefit from the tax incentives. This, alongside other components of the Inflation Reduction Act (IRA), could be low-hanging fruit as politicians look for places to cut spending. It’s unclear whether this will cause companies to try and get boots on the ground before the rule potentially changes, or if it could cause them to delay starting the project entirely. In either case, we don’t think project delays derail the Made in America thesis, but more fits and starts should be expected.


Focus on infrastructure and national security


Relative to the IRA, the CHIPS Act and the Infrastructure Investment and Jobs Act (IIJA) tend to enjoy broader support. Critical infrastructure and semiconductors are both tied to national security, which should reduce the risk of significant budget cuts under a new administration. The data look supportive here, too. In 2023, highway and street construction grew at the fastest year-over-year clip in 20 years. Water supply and sewage construction were additional pockets of growth.


Despite the challenges and uncertainty that lie ahead, the efforts being made to upgrade US infrastructure and build out domestic manufacturing capabilities should drive further growth opportunities for the companies positively exposed.


Main contributor – Michelle Laliberte


Read the original report : Made in America powers ahead despite challenges, 7 February 2024.