The road to real recovery is open

Sze Tsung Leong—Yossi Milo Gallery Lincoln Center, New York, 2003
From the series Cities

Things are going to be okay. In fact, better than okay.

This is the year that the U.S. economy could pick up steam on the way back to broad-based prosperity. Assuming governments here and around the world limit their follies (yes, I’m being hopeful), we could be at the beginning of a run rivaling the manufacturing boom of the ’50s and ’60s that built the middle class, or the tech boom of the ’90s that built the investor class.

What exactly will we be running on?

First, there is the leap in energy production due to improved technology. I’ve written in this space previously about the remarkable growth in natural-gas extraction that is pushing down prices dramatically.

Oil production, too, is ramping up. According to the International Energy Agency, the U.S. is projected to become the world’s biggest oil producer by 2020 and could be entirely energy independent 15 years after that.

The growth in domestic oil and gas production could support more than 2.5 million higher-wage jobs over the next three years alone, according to a new IHS Global Insight study.

A return to making stuff

Declining energy prices have a positive effect on another sector of the economy that’s already coming back: manufacturing. More than half-a-million industrial jobs have been created since 2010, and PricewaterhouseCoopers estimates that employment in manufacturing will rise by another million over the next dozen years or so.

To be sure, we won’t be going back to a future of 30 years ago: More than 5 million U.S. factory jobs disappeared between 1987 and 2010. And to really grow the part of the economy that makes and moves stuff, the country must improve the sorry state of its roads, bridges, and communications infrastructure — a job for both the public and private sectors.

Still, rising labor costs in Asia, a lower dollar, and falling energy costs are good news for U.S. industry.

Related: Investing by sector

“Manufacturing job growth has been fairly robust, and the recovery of the auto industry quite strong relative to what people had thought,” notes Deutsche Bank economist Brett Ryan. After a recent lull, he expects further improvement this year.

The way to participate

What does this mean for you as an investor?

In broad terms, hunkering down in cash and bonds would be a bad idea in a growing economy. At a tactical level, tilting your stock holdings a bit toward energy and manufacturing is a good idea.

You can do that via the mutual and exchange-traded funds. To hold the biggest, and probably least volatile, stocks, use the iShares ISHARES TRUST U.S. INDUSTRIALS ETF IYJ 0.05% and SPDR ENERGY SELECT SECTOR SPDR ETF XLE -0.65% ETFs in the table below. For smaller companies, go with the Guggenheim RYDEX ETF TR GUGGENHEIM S&P 500 EQUAL RGI -0.14% and PowerShares POWERSHARES EXCHAN WILDERHILL PROGRESSIVE ENE PUW -0.54% portfolios.

Here’s to a prosperous 2013!

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