Capextravaganza | Financial Times
David Glaymon is a former partner at Kynikos Associates and financial analyst.
The market vibes on the Federal Reserve’s inflation fight is looking more like a week-to-week battle dominated by the latest data and headlines.
Last week, supporters of an interest rate “pivot” received a boost when Inflation unexpectedly rose less than expected. The week before it was the opposite, with a one-two punch delivered by Fed chair Jay Powell and a strong employment report.
Watching this battle — with the Fed trying to fight inflation with its limited tools of interest rates and balance sheet management — the classic Japanese Godzilla movies come to mind. In those films, the legendary monster, played by a person in a rubber suit, tramped around a set crushing miniature buildings and vehicles. It may be entertaining, but it isn’t very believable.
But nestled within the October employment report was some data that hinted that Ghidorah, Godzilla’s greatest foe, might be lurking over the hill.
Manufacturing job creation has actually accelerated this year, with another 32,000 jobs generated in October. Here is the detailed breakdown from the BLS:
Manufacturing employment growth will probably remain strong for three reasons. And like Ghidorah’s three heads, these will complicate Godzilla-Powell’s inflation fight.
The first head is ongoing direct fiscal stimulus from several major programs signed into law over the past year. These are fuelling corporate investment, despite the Fed’s rate increases ramping up the cost of capital. For example, only $840bn of last year’s $1.2tn Bipartisan Infrastructure Law has actually been appropriated by Congress so far, according to data analysed by Politico, and the majority of the actual spending is yet to come.
The second head is investment triggered by Russia’s invasion of Ukraine. Soaring energy prices is like a vice tightening around the neck of European industrial companies, which are being forced to reduce production or even shutter plants. In the US, however, it is a different story, thanks at least partly to the US Inflation Reduction Act.
While BASF’s recent decision to “permanently” downsize in Europe made waves, two months earlier the company announced a $780mn commitment to double production capacity at its chemical manufacturing complex in Louisiana. This is not an isolated incident.
And then there is the third head — the shortening of supply chains, including due to rising geopolitical tensions with China.
The $52bn CHIPS Act has spurred GlobalFoundries, Intel, Micron, Samsung Foundry, TSMC, Texas Instruments, and Wolfspeed to start building fabs in the US. The investments and the potential jobs are significant. On the other side of the manufacturing spectrum, Nutella owner Fererro Group last week broke ground on a new $214mn Kinder Bueno production facility in Illinois. This is the first time Kinder Bueno chocolate bars will be made in North America.
The impact of corporate investment is showing up in the jobs data. US manufacturing employment now exceeds pre-Covid levels and is heading towards levels last seen before the financial crisis.
The ReShoring Initiative estimates that 350,000 jobs would be created this year from reshoring and foreign direct investment. That estimate may prove to be conservative as geopolitics, supply chain shrinkage, and a healthy dose of stimulus create stoke the need for companies to invest and expand in the US.
But this is only part of the story. Every manufacturing job helps create a multitude of other jobs among suppliers and the public sector, thanks to the increased tax revenue. The Economic Policy Institute’s economic employment multipliers for durable and non-durable manufacturing is about 6 times. This indicates that 350,000 jobs in turn will create over 2mn indirect jobs. And that is the headwind that the Fed is fighting.
The story may be inflation and prices at the pump or in grocery stores, but the battle is really about stimulus and unexpectedly strong corporate investment.