Our U.S. Thematic Strategist Michelle Weaver and U.S.
Multi-Industry Analyst Chris Snyder discuss a North America Big
Debate for 2026: Whether investments in efficiency and
productivity will spark a transformation of U.S.
manufacturing.
Read more insights from Morgan Stanley.
----- Transcript -----
Michelle Weaver: Welcome to Thoughts on the
Market. I'm Michelle Weaver, Morgan Stanley's U.S. Thematic and
Equity Strategist.
Chris Snyder: I'm Chris Snyder, U.S.
Multi-Industry Analyst.
Michelle Weaver: Today: Will 2026 be the
year of U.S. Manufacturing's transformation?
It's Tuesday, January 13th at 10am in New York.
U.S. reshoring has been an important component of our multipolar
world theme, and manufacturing is one of those topics we have
always had our eyes on. We've been making some big predictions
about a transformation in this sector, so it makes sense that it
features prominently in the big debates we've identified for
North America in 2026.
In the last few years, there's been a steady stream of
investments in automation controls and upgrades across U.S.
manufacturing. And this is happening against a backdrop of
shifting global supply chains and lingering policy uncertainty.
Now, the big market debate is whether these investments will
generate a whole wave of greenfield projects – that is brand new,
multi-year construction initiatives to build facilities,
factories, and infrastructure from the ground up.
Chris, what exactly is driving this current wave of efficiency
and productivity investment in U.S. manufacturing? And how long
term of a trend is it?
Chris Snyder: I think what's driving the
inflection is tariffs. The view that has underpinned my U.S.
reshoring call is that I believe companies have to serve the U.S.
market. The U.S. accounts for 30 percent of global consumption –
equal to EU and China combined. It is also the best margin region
in the world. So, companies have to serve the market, and now
what they're doing is they're going back and they're looking at
their production assets that they have in the U.S. and they're
saying, how can I get more out of what's already here?
So, the quickest, cheapest, fastest way to bring production
online in the U.S. is drive better productivity and efficiency
out of the assets you already have. And we're seeing it come
through very quickly after Liberation Day.
Michelle Weaver: And you think these
investments are an on ramp to larger greenfield projects. What
evidence do we have that this efficiency spend is setting the
stage for a ramp up in new factory builds?
Chris Snyder: I think this is absolutely
the leading indicator for greenfields because this is telling us
that the supply chain cost calculation has changed. What all of
these companies are doing are saying, ‘Okay, how can I get
products into the U.S. at the cheapest cost possible?’ What we're
seeing is the cost of imports have gone higher with tariffs, and
now it's more economically advisable for these companies to make
the product in the United States. And if that's the case, that
means that when they need a new factory, it's going to come to
the United States. They might not need a factory now, but when
they do, the U.S. is at least incrementally better positioned to
get that factory.
Other data that we're seeing; I think the most interesting data
that's come out of all of this is the bifurcation in global PPI
or producer price data. If you look at it on a regional basis,
North America markets saw PPI go higher in 2025. They were all
the tariff exempt regions – U.S., Canada, and Mexico. Every other
region in the world saw PPI down year-to-date.
That means that these companies and factories are having to lower
prices to stay competitive in the global market and sell their
products into the United States. That tells us also where the
next factory is going. If you have a factory in the U.S. and a
factory in Malaysia, and your U.S. factory is pricing up, that
means the return profile is getting better. If your factory in
Malaysia is pricing down, it means the returns are getting worse
and you're pricing down because it's over-capacitized. That's not
a region where you're going to add a factory. You know, what I
like to say is – price drives returns, and supply is going to
follow returns. And right now, that price data tells us the
returns are in the United States.
Michelle Weaver: And, for people that might
not be familiar with PPI, can you explain it to everyone? It's
sort of like CPIs cousin, but how should people think about
it?
Chris Snyder: Yeah, yeah, so PPI, Producer
Price Inflation, it's effectively the prices that my companies,
the producers of goods are charging. So maybe this is the price
that they would then charge a distributor, who then the
distributor ultimately is selling it to a store. And then that's,
you know, kind of factoring its way into CPI. But it starts with
PPI.
Michelle Weaver: And what are some of the
key catalysts investors should be looking for in 2026 that could
confirm that this greenfield ramp is underway?
Chris Snyder: The number one, you know,
metric I think the market looks at is manufacturing project
starts. Every month there's data that comes out and says how many
manufacturing projects were announced in the U.S. that month. And
what we've seen coming out of Liberation Day is that number on a
project value has gone higher. You know, it hasn't totally
inflected, but it has pushed higher.
The thing that has inflected is the number of announcements. So,
this is not like two or three years ago where we had these mega
projects. What we're seeing right now is very broad. And to me
that's more important because that shows that there's durability
behind it. And it shows that this is because the economics are
saying it makes sense. It's not necessarily just because, okay, I
got an incentive and I'm trying to follow alongside that.
Michelle Weaver: Mm-hmm. The market seems
skeptical though, pointing out that the ISM manufacturing
purchasing managers index has been shrinking. This could be a
sign that demand isn't strong enough to justify building new
factories right now. How would you address that concern?
Chris Snyder: Yeah, no, I mean, you're
definitely right. Like the biggest pushback on the reshoring
theme is the demand for goods is not very strong. Consumers are
not in a good place. So why would companies add capacity in this
backdrop? That's never happened before. Companies only add
capacity when they're producing a lot and the utilization goes
up. This is not a normal cycle. Throughout history, the
motivation to add capacity was when your production rates go
higher, your utilization hits a certain level, and then you add
capacity. So, it always started with demand to your point.
The motivation right now is tariff mitigation. And you do not
need higher demand to support that. The U.S. is a $1.2 trillion
trade deficit. So, that more than anything gets me confident in
the theme and the duration behind it. And I think it's a very
different outlook when you look across the international markets.
They're the ones that need to find incremental demand to justify
investment.
Michelle Weaver: And given the scale of
U.S. purchasing power and the shift in global capital flows, how
do you see these manufacturing trends impacting broader
performance in 2026?
Chris Snyder: We published our outlook and
we're calling for the U.S. Industrial Economy to hit decade high
growth levels in the back half of [20]26 and into [20]27. And
this is a big reason why. We think about this a lot from a CapEx
perspective. And we're seeing the investment, we think that ramps
into larger greenfields. But we're also seeing it in the
production economy.
If you look at the delta between U.S. consumer spend and U.S.
manufacturing production, that has really narrowed in recent
months. And that tells us that we're increasingly serving U.S.
demand through domestic production. So that's another factor
that's going to drive activity higher and it doesn't need a
cycle. And I think that's what's really important. And I think
that is what creates this as a more secular and also durable
opportunity.
So obviously reassuring is something that's, you know, very close
to me and important for the industrial economy. But as you think
about the multipolar world theme more broadly, how do you think
that evolves in 2026?
Michelle Weaver: Yeah, absolutely. Last
year the multipolar world was an incredibly powerful theme. And
when investors were thinking about the multipolar world last
year, it was largely about how are companies going to mitigate
the risk of tariffs in the near term.
We had the policies come out and surprise everyone in terms of
the breadth and the magnitude of the tariffs we saw. We had a lot
of policy uncertainty around what is that final level of tariffs
going to look like. And a lot of the reaction was really short
term. It's how can we use our inventory buffers to try and
preserve our margins? How much of these additional tariff costs
can we pass off to the end customer? How can we insulate
ourselves in the near term?
I think this year it's going to turn to more longer-term
strategic thinking. Reshoring and a lot of the greenfield
projects you were talking about, I think will absolutely be an
important component of the multipolar world this year. I think
we're also likely to see a greater emphasis on U.S. defense. With
the action we just saw in Venezuela. I think we're going to see
more of that defense component of the multipolar world starting
to be expressed in the U.S. It was a big part of the expression
of the theme in Europe last year, but I think it will gain
relevance in the U.S. this year.
Chris Snyder: Yeah. And I think the next
chapter in U.S. industrial growth is just getting going. It's
taken 25 years for the U.S. to seed roughly 12 percentage points
of global share in manufacturing. We don't think they take that
much back. But we think this is a very long runway
opportunity.
Michelle Weaver: Mm-hmm. And as we watch
for the next wave of greenfields, it's clear that efficiency and
productivity investments are more than just a stop gap. They're a
longer-term theme and they're a foundation for a new era in U.S.
manufacturing.
Chris, thank you for taking the time to talk.
Chris Snyder: Great speaking with you,
Michelle.
Michelle Weaver: And to our listeners,
thanks for listening. If you enjoy Thoughts on the Market, please
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