To many, the perception of the Louisville and Greater Kentucky economy is one of revelry: bourbon, horse racing, fried chicken…you catch the drift. But while that may be the area’s public face, the boots-on-the-ground economy is much more diverse. In fact, the region is becoming somewhat of a manufacturing hub, with deep roots in the automotive sector and growing expertise in aerospace, pharmaceuticals, and basic materials. Despite a national economy beset by high inflation and elevated interest rates, the state of Kentucky produced a record $40 billion of international exports in 2023. And with federal ambitions for a U.S. manufacturing renaissance, Louisville is well positioned to take advantage.
Take aerospace and defense as an example. The sector is notable given both its economic importance and forward growth outlook. As of writing, international flight activity continues to smash records. Despite higher prices, the post-Covid boom in services spending remains a major tailwind for travel sectors. From a local perspective, Kentucky increased its aerospace exports nearly 30% from 2022, when it shipped over $5 billion in products and parts to Europe alone. The federal spending environment may be constricted in coming years given the high budget deficit, but structural tailwinds and (increasingly rare) bipartisan support will support the aerospace and defense sector.
Louisville is also increasingly well positioned to take advantage of a U.S. manufacturing boom not just because of its investment in production capabilities, but because of its long-standing status as a global logistics and transportation hub. Louisville Muhammad Ali International Airport is among the top ten busiest cargo operations in the world, and the city’s centralized location makes it – along with many other Midwest and Southern metros – mission critical to the overall goal.
A recurring theme in today’s investing world is Deglobalization. As our partners at Strategas put it, “The golden age of globalization that started with the fall of the Berlin Wall in 1989 seems to be coming to an end. Legislators on both sides of the aisle in Washington can agree on the risk China’s emergence poses to American prosperity and security, and we believe many American companies will look to shorten the supply chains that help them produce and distribute the products they sell.” We’ve already noted the proclivity for nations to increase defense spending in times of global strife, but there are far longer-reaching implications – both positive and negative – of a trend towards a more deglobalized world.
For instance, both the recent geopolitical turmoil and the Covid-19 pandemic laid bare just how fragile some of our important supply chains had grown (semiconductors, biotechnology, etc.). Now, there is a concerted and state-sponsored effort to move some critical manufacturing capabilities either back to the U.S. (onshoring) or to nearby allies (nearshoring). As tensions with China continue to escalate, particularly around technology transfer and data sharing, the U.S. is likely to continue the trend of diversifying its operations away from China. The upcoming presidential elections may determine the speed of this shift, the tactics utilized, and the tone of the rhetoric, but the process of this shift has already begun. Case in point, for the first time in twenty years, China was not the United States’ top trade partner in 2023 – it was Mexico.
For Kentucky, there is already a longstanding relationship with our border countries: both Mexico and Canada were in the top three nations for total exports from the state in 2023. In Mexico, Louisville finds a natural trade partner in the automotive space, with motor vehicles and motor vehicle parts comprising a third of total exports. Federal funds earmarked to subsidize and promote domestic manufacturing have skyrocketed in recent years, and metros like Louisville are likely to benefit given the existing expertise and broad diversity of the manufacturing base.
Deglobalization and elevated geopolitical tensions have pushed the U.S. to reconsider its manufacturing policies of the last few decades. With hundreds of billions earmarked to support domestic manufacturing and onshoring critical supply chains, cities like Louisville and states like Kentucky stand to benefit. Investment in automotive, aerospace, healthcare, and pharmaceuticals, among other industries, paired with deep expertise in transportation and logistics have the potential to bring investment – and jobs – to the area in coming years. The record number of exports in 2023 may well just be the tip of the iceberg.
