US manufacturing is having a renaissance

The rate cuts are coming # # --------------------------------------------------------------- The key takeaways today: - Mega projects are reviving US manufacturing - The geopolitics of artificial intelligence - What's the key to an emerging markets comeback? - Inflation is still improving — and rate cuts are still coming - Briefings Brainteaser: The biggest markets for luxury goods --------------------------------------------------------------- A renaissance for US manufacturing Goldman Sachs Research is tracking more than $1 trillion in manufacturing and infrastructure investments that have been announced, over $500 billion of which are mega project investments (greater than $1 billion in size). These include semiconductor plants ($222 billion, or 43%), [electric vehicle and battery plants]( ($114 billion, or 22%), and clean energy projects ($86 billion, or 17%). Based on this data, Goldman Sachs Research analysts Joe Ritchie, Vivek Srivastava, and Aanvi Patodia expect a renaissance in American manufacturing and an increase in equipment orders for these projects this year. - Instead of looking just at projects that have been announced, Goldman Sachs Research dug deeper into individual projects that have broken ground since 2021 to understand the timing of construction schedules and any increased costs. - Project activity, a subset of announced projects that have already broken ground for construction, is on track to be more than $80 billion in both 2022 and 2023, compared with around $23 billion per year between 2011 and 2021. But project development is still in the early stages, and only a small proportion of equipment orders has been recognized so far. - It's taken longer than expected for some of these mega projects to translate into equipment orders because of the nature of the work. A typical non-residential construction project takes 18–24 months from breaking ground to the start of production, whereas a semiconductor plant usually takes 36–60 months. Equipment providers should see an uptick in orders from these projects in the first half of this year, according to Goldman Sachs Research. - Texas is the leading state in terms of projects that have broken ground (with about 25% of all projects in US), driven in part by semiconductor plants from major manufacturers. --------------------------------------------------------------- How generative AI will transform world politics A year after the release of ChatGPT, generative AI is already demonstrating how it will [transform technology]( and markets — and also the balance of power between nations, write [Jared Cohen and George Lee, co-heads of Goldman Sachs's Office of Applied Innovation](. - The US and China are the world's top AI competitors. But most cutting-edge AI innovation comes from US companies and universities, whereas China faces an uphill battle in training large language models. The US seeks to maintain its advantages while China's aim is to close the gap. That dynamic will drive geopolitical and economic decision-making in Beijing and Washington. The technology competition will include export controls, sanctions, tariffs, industrial policy, investment screening, and other measures. - The nature of different societies can enhance or impede technological innovation. Open societies like the US worry about certain AI risks, including the accuracy of LLM outputs and hallucinations, but prioritize progress and innovation. Meanwhile, in more closed societies like China, LLMs pose a threat to the government's ability to control speech and information. These concerns have led the Chinese state to impose restrictions that may limit innovation, hold back incumbents, and deter new entrants and entrepreneurs from engaging with this technology. - While they are the dominant players, Washington and Beijing are not the only AI powers. The UK and [geopolitical swing states]( such as the UAE, Israel, and India are key stakeholders, and they may form innovation blocs: alliances in which they partner with more dominant states to pursue common goals. Countries like Taiwan, the Netherlands, Japan, and South Korea are critical to the manufacturing of semiconductors, which provide the computing power driving generative AI. Take Taiwan: Its semiconductor industry is indispensable to global companies, and its leaders have seen that as a form of security. But while Taiwan manufactures 68% of semiconductors globally and 90% of leading-edge semiconductors, it should not take its so-called “silicon shield” for granted. --------------------------------------------------------------- What's the key to an emerging markets comeback? Not valuations Emerging market equities may not present the value that some investors think, [says Caesar Maasry, head of emerging markets cross-asset strategy]( at Goldman Sachs Research. At first glance, the S&P 500's price-earnings ratio, currently at about 20, is high relative to both historical and global comparisons — with emerging market valuations at about half that level. Does this mean that emerging market stocks are poised to outperform from here? Not necessarily, Maasry says. He notes that US profits have grown by 7% per year over the past decade, while emerging market earnings have essentially been stagnant. “Although emerging market equities appear to be cheap, they could be cheap for a reason,” he says. That's not to say he's bearish. “We expect 2024 to be the year in which emerging market profits finally lift off from 0% growth, and we expect modest outperformance,” Maasry says. In short, he believes that rising earnings growth, not low valuations, will prove the key to a comeback in emerging markets. --------------------------------------------------------------- Forecast: Rate cuts are coming this year Global core inflation picked up to an estimated one-month annualized rate of 2.6% in December, from the rock-bottom 1.2% reading in November (averaged across early hikers in emerging markets and the G10, excluding Japan). However, [Goldman Sachs Research still thinks inflation is improving](. The three-month annualized rate fell further to an estimated 2% in December. The adjustment in core goods prices is far from complete — for example, US used cars have only unwound 31% of their Covid-related price increase. And our economists expect both service inflation and wage growth to continue slowing gradually in a lagged response to the improved supply / demand balance across the global economy. The US has been a key part of the global decline in inflation, and the country's labor market is continuing to rebalance. Goldman Sachs Research therefore expects the Federal Reserve to start cutting rates soon, most likely in March. Our economists are forecasting five cuts this year, which is below the six to seven cuts reflected in financial markets. By comparison, only 9% of clients expect the first rate cut in the first quarter of this year, according to a poll this week at Goldman Sachs's Global Strategy Conference in London. --------------------------------------------------------------- Briefings Brainteaser: The laps of luxury Four geographies made up 77% of all global sales of luxury goods in 2023, according to Goldman Sachs Research. If the three biggest geographies are Europe (28%), Mainland China (18%), and the US (17%), what is the fourth, with 14%? A) The Middle East B) Japan C) Brazil D) South Korea [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news [Bloomberg]( January 4 Goldman's Feldgoise sees a lot of pent-up M&A demand (3:45) [CNN]( January 16 Goldman Sachs blows away earnings expectations --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The information provided in this newsletter is for informational purposes only and does not constitute a recommendation from any Goldman Sachs entity to the recipient. Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this newsletter or to its recipient. Certain information contained in this program constitutes “forward-looking statements,” and there is no guarantee that these results will be achieved. 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