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Playing The USA Manufacturing Revival
With high unemployment, stagnant consumer spending and falling home prices, it's hard to find any real bright spots to the U.S. economy. While things have improved since the depths of the Great Recession, the economy continues to plod along. However, within this plodding, several international managers now point to one sector of the U.S. economy that could be bracing itself for a major revival. For investors, this "left for dead" sector could offer strong dividends and out performance in the months ahead.
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"Uncompetitive" Emerging Market Economies
The manufacturing sector is the second largest contributor to GDP growth in the United States, behind retail sales. As the "bed-rock of America," capital goods and industrial manufacturers will continue to see gains, as the economy improves. So far over the last two years, the industrials have seen expanding production, as inventory replenishment has taken hold; production continued to rise in the third quarter. A recent report from the Bureau of Labor Statistics showed a robust 5.4% increase in third quarter manufacturing sector productivity and the Institute for Supply Management's latest PMI readings showed that economic activity in the sector expanded for the 28th consecutive month, rising 1.9%.
While the expansion in the sector should be enough to get some investors excited, the real gains for the industrials could be coming in the year ahead. A variety of analysts are pointing to several factors that will help the U.S. come back as a major manufacturing center. This industrial renaissance is coming at the expense of increasingly uncompetitive emerging markets. These emerging nations have built their economies by exporting cheap goods to the developed world. However, this growth has forced companies in a variety of these countries to now pay higher wages. The U.S. manufacturing sector will be a beneficiary to those higher wage costs.
In an effort to better compete with the emerging markets, state and local governments now offer generous tax credits and incentive payments for companies that manufacture locally. In addition, labor unions have begun to take a less "self-interested" stance on manufacturing wages, in order to keep more of their members employed. Analysts also predict a relatively weak dollar, stable labor market and highly liquid capital markets, will help boost the industrial sector. (Emerging markets are risky, but the rewards they can create make them a worthy addition to any portfolio. For more, see Should You Invest In Emerging Markets?)
Perhaps the biggest provider of benefit for the U.S. industrial firms could be Europe and China. In September, Chinese exports to the EU have already fallen to their lowest levels since June. As the world's largest exporter, China is incredibly sensitive to a weakening euro, as the bulk of its trade surplus relies on exports to the indebted region. Ultimately, the yuan may rise and benefit the weaker dollar-based U.S. manufacturers.
Playing an Industrial Revival
For investors, adding a dose of manufacturing might to a portfolio, could pay-off in 2012. The proxy for the sector, the Industrial Select Sector SPDR (ARCA:XLI) currently can be had for a P/E of just 13 and 2% yield, roughly where it was a year ago. The ETF follows a basket of 63 different firms including Honeywell (NYSE:HON) and 3M (NYSE:MMM). Investors can also use the Vanguard Industrials ETF (ARCA:VIS) as a broad play.
The firms that manufacture the basics that other firms need, should continue to see the benefits of any inventory ramp-ups. RBC Bearings (Nasdaq:ROLL) manufactures a variety of precision plain, roller and ball bearings for various industries and recently reported a 33% increase in EPS, for the last quarter. In addition, industrial supply firms Fastenal (Nasdaq:FAST) and W.W. Grainger (Nasdaq:GWW) will see gains.
America's prowess in agriculture also extends into the manufacturers of Ag-equipment. As the world hungers for more food, both Deere (NYSE:DE) and AGCO (Nasdaq:AGCO) will see greater demand for their tractors. Also benefiting will be irrigation specialist Lindsay (NYSE:LNN), who continues to see greater demand for water efficiency products.
The Bottom Line
While it's hard to find things to like about the U.S. economy, the manufacturing sector continues to be a bright spot and some analysts think that it's about to get brighter. Higher wages in emerging markets could spark a U.S. industrial revival. For investors, betting on a broad manufacturing play, like the iShares Dow Jones US Industrial (NYSE:IYJ), or individual firms, like Barnes Group Inc. (NYSE:B), could lead to great profits in 2012. (For related reading, see Using ETFs To Build A Cost-Effective Portfolio.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
"Uncompetitive" Emerging Market Economies
The manufacturing sector is the second largest contributor to GDP growth in the United States, behind retail sales. As the "bed-rock of America," capital goods and industrial manufacturers will continue to see gains, as the economy improves. So far over the last two years, the industrials have seen expanding production, as inventory replenishment has taken hold; production continued to rise in the third quarter. A recent report from the Bureau of Labor Statistics showed a robust 5.4% increase in third quarter manufacturing sector productivity and the Institute for Supply Management's latest PMI readings showed that economic activity in the sector expanded for the 28th consecutive month, rising 1.9%.
While the expansion in the sector should be enough to get some investors excited, the real gains for the industrials could be coming in the year ahead. A variety of analysts are pointing to several factors that will help the U.S. come back as a major manufacturing center. This industrial renaissance is coming at the expense of increasingly uncompetitive emerging markets. These emerging nations have built their economies by exporting cheap goods to the developed world. However, this growth has forced companies in a variety of these countries to now pay higher wages. The U.S. manufacturing sector will be a beneficiary to those higher wage costs.
In an effort to better compete with the emerging markets, state and local governments now offer generous tax credits and incentive payments for companies that manufacture locally. In addition, labor unions have begun to take a less "self-interested" stance on manufacturing wages, in order to keep more of their members employed. Analysts also predict a relatively weak dollar, stable labor market and highly liquid capital markets, will help boost the industrial sector. (Emerging markets are risky, but the rewards they can create make them a worthy addition to any portfolio. For more, see Should You Invest In Emerging Markets?)
Perhaps the biggest provider of benefit for the U.S. industrial firms could be Europe and China. In September, Chinese exports to the EU have already fallen to their lowest levels since June. As the world's largest exporter, China is incredibly sensitive to a weakening euro, as the bulk of its trade surplus relies on exports to the indebted region. Ultimately, the yuan may rise and benefit the weaker dollar-based U.S. manufacturers.
For investors, adding a dose of manufacturing might to a portfolio, could pay-off in 2012. The proxy for the sector, the Industrial Select Sector SPDR (ARCA:XLI) currently can be had for a P/E of just 13 and 2% yield, roughly where it was a year ago. The ETF follows a basket of 63 different firms including Honeywell (NYSE:HON) and 3M (NYSE:MMM). Investors can also use the Vanguard Industrials ETF (ARCA:VIS) as a broad play.
The firms that manufacture the basics that other firms need, should continue to see the benefits of any inventory ramp-ups. RBC Bearings (Nasdaq:ROLL) manufactures a variety of precision plain, roller and ball bearings for various industries and recently reported a 33% increase in EPS, for the last quarter. In addition, industrial supply firms Fastenal (Nasdaq:FAST) and W.W. Grainger (Nasdaq:GWW) will see gains.
America's prowess in agriculture also extends into the manufacturers of Ag-equipment. As the world hungers for more food, both Deere (NYSE:DE) and AGCO (Nasdaq:AGCO) will see greater demand for their tractors. Also benefiting will be irrigation specialist Lindsay (NYSE:LNN), who continues to see greater demand for water efficiency products.
The Bottom Line
While it's hard to find things to like about the U.S. economy, the manufacturing sector continues to be a bright spot and some analysts think that it's about to get brighter. Higher wages in emerging markets could spark a U.S. industrial revival. For investors, betting on a broad manufacturing play, like the iShares Dow Jones US Industrial (NYSE:IYJ), or individual firms, like Barnes Group Inc. (NYSE:B), could lead to great profits in 2012. (For related reading, see Using ETFs To Build A Cost-Effective Portfolio.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
by
Aaron Levitt
Aaron Levitt is a SABEW investment journalist and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Aaron is a graduate of The Pennsylvania State University where he studied Economics and International Business and he is an advocate for long-term investing with a global framework. You can follow his picks and pans at @AaronLevitt
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