U.S. Manufacturing Is Still Alive & Kicking

By Aaron Levitt | June 27, 2013 AAA

While there are still some major things still wrong with the U.S. economy, much has turned around since the depths of The Great Recession. Perhaps most amazingly has been the burgeoning manufacturing revival here in the states. Considered "left for dead" in the face of cheaper-waged emerging market nations, the U.S. manufacturing sector has surged since the credit crisis. Recent data with regards to durable goods orders continue to support America’s industrial base. For investors, the sector could offer strong dividends and outperformance in the months ahead as volatility continues rear its ugly head.

A Strong May Reading
As the "bedrock of America," the industrial manufacturers have continued to see gains, as the economy has begun to improve. The latest boost to the sector comes from rising orders for durable goods. At their core, durable goods are items that are expected to last at least three years and according to the Commerce Department, orders for long-lasting manufactured items rose 3.6% in May. That gain was significantly higher than economists’ estimates. Additionally, total sales of durable good climbed 1.2% for May- that’s the biggest gain in nearly six months.

SEE: Economic Indicators That Do-It-Yourself Investors Should Know

While a large percentage of that increase was due to a surge in commercial aircraft orders, businesses still ordered more required needed equipment than estimated. The number of computers, machinery, primary metals and other goods needed for business investment plans rose 1.1% in May. That matched similar gains in April and March. Overall, this proxy of business health hasn’t increased for three consecutive months since the fall of 2011.

Several Factors Are Contributing To The Rise
Weighing components including shipping, energy and labor costs, as well as supply chain efficiency, taxes and economic incentives; companies are now returning to the U.S. in spades. For example, aluminum producer Alcoa’s (NYSE:AA) Davenport facility has actually added 600 jobs since the height of the recession and is training 150 new workers to staff a $300 million expansion. All because the Dow component found it more beneficial to stay at home.

All in all, the gains in durable goods orders suggest that businesses are growing more confident in the economy, a positive sign for America’s industrial complex.

Manufacturing Some Gains
Given the good news, the industrial manufacturers and capital goods companies continue to lead the way. For investors, playing the revived industrial boom could be one of the better bet going forward for the long term. Here are some picks.

With nearly $3 billion in assets, the Industrial Select Sector SPDR (NYSE:XLI) continues to be one of the largest and most liquid funds in the sector. However, for less in the way of expense, investors can get a wider portfolio of industrial firms with the Vanguard Industrials ETF (NYSE:VIS). For only 0.14% in expenses, the VIS tracks 351 different industrial firms- versus just 63 for the XLI. Holdings include giants such as Honeywell (NYSE:HON) and General Electric (NYSE:GE) as well as smaller players like Crane (NYSE:CR). The ETF currently yields 1.74% and offers a good starting point for investors.

The firms that manufacture the basics that other firms need, should continue to see the benefits of a recovering economy. Lincoln Electric Holdings (NASDAQ:LECO) –who manufacturers a variety of welding and cutting products has seen its fortunes rise over the last few years. First quarter earnings for the firm jumped 21%- beating analyst’s estimates. Including this earnings beat, the company has consecutively beating analyst expectations in three of last four quarters. In addition, industrial supply firms like Illinois Tool Works (NYSE:ITW) and Fastenal (NASDAQ:FAST) will continue to see gains.

SEE: Earnings Guidance: Can It Accurately Predict The Future?

With transportation continuing to lead the way, both BorgWarner (NYSE:BWA) and United Technologies (NYSE:UTX) might be good bets. According to the Commerce Department, vehicle sales are currently moving at a 15.2 million annualized rate- a 2.4% increase from the prior month. That will benefit BorgWarner’s auto parts business. At the same time, demand for UTX’s jet engines continue to surge as the recover takes hold.

The Bottom Line
With durable and core capital goods orders rising, businesses are still betting on a strong U.S. economy in the months ahead. That will ultimately benefit the industrial firms making these items. For investors, that means continuing to add quality manufacturing names to their portfolios. The previous picks along, with Hexcel (NYSE:HXL) make ideal selections to play the trend

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