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. Employment numbers continue to strengthen, consumer confidence is rising and even housing is showing some signs of a recovery. Perhaps most interesting is the persistent manufacturing revival. 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 continues to support the industrials. For investors, the sector could offer strong dividends and outperformance in the months ahead.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Rising ISM Numbers
As the "bed-rock of America," the capital goods and industrial manufacturers have continued to see gains, as the economy has begun to improve. Over the last two years, the industrials have benefited from inventory replenishment and have increased production accordingly. Manufacturing continued to expand in March, as the Institute for Supply Management's (ISM) latest PMI reading has risen for 32 consecutive months. The key index rose to 53.4 in March, up from 52.4 in February. Any reading above 50 indicates growth in the manufacturing sector. In addition, manufacturing attributed to more than 37,000 of the 120,000 new jobs added in the latest jobs report. Overall, the ISM's survey showed improvement in hiring outlooks, production plans and the backlog of orders. This echoed similar findings by Briefing.com.


The recent positive March numbers highlight a continued trend for the sector. According to the Commerce Department, manufacturing's share of the nation's GDP shrank to only 11% during the recent economic turmoil. That is down from around 26% in 1947. However, 2010 saw the biggest yearly gain in more than 50 years, landing at 11.7%. Analysts expect 2011's number, which will be calculated at the end of April, to be even higher.

This industrial renaissance is coming at the expense of increasingly uncompetitive emerging markets. These nations have built their economies by exporting cheap goods to the developed world. However, this growth has now forced companies in a variety of these countries to pay higher wages. China is quickly losing its crown as the "low-cost king."

Additionally, the type of goods built by the U.S. has changed. Like Germany, the manufacturing sector now produces high-tech value-added components. The natural gas boom and subsequent falling prices have also benefited petrochemical and steel producers. Add these to the generalized weaker dollar and you have a recipe for long-term export and manufacturing success.

SEE: Manufacturing And Economic Recovery


Betting On The Boom
For investors, playing the revived industrial boom could be one the better plays going forward into 2012. Analysts expect earnings for the S&P 500 industrial sector to rise 13% this year. That compares to just 9% for the broader index. The Industrial Select Sector SPDR (ARCA:XLI) allows investors to directly bet on the broad indexes sub-sectors. The fund spreads its approximate $3 billion in assets across 63 different holdings, including 3M (NYSE:MMM) and United Technologies (NYSE:UTX). The fund charges a dirt-cheap 0.18% in expenses. For an extra 0.01%, investors can access a wider portfolio via the Vanguard Industrials ETF (NYSE:VIS).

Providing the engines for a variety of mining, oil equipment and other industrial applications, Cummins (NYSE:CMI) has continued to see its star shine over the last two years. The firm has consistently beaten analysts' estimates for the last four quarters, and its partnership with Westport (Nasdaq:WPRT) continues to pay dividends. Shares of Cummins can be had for a P/E ratio of roughly 11.66 and around a 1.4% dividend yield. Similarly, small-engine maker Briggs & Stratton (NYSE:BGG) should do well, as any sort of housing recovery will drive demand for its power equipment engines.

SEE: The Benefits Of ETF Investing


The Bottom Line
With the Institute for Supply Management's PMI index rising for the 32nd month in a row, it's safe to say that the U.S. is experiencing a manufacturing revival. The data continues to get better and long-term trends are in place to keep it going for a while. For investors, that means adding a dose of industrial might. Broad exchange-traded funds like the iShares Dow Jones US Industrials (ARCA:IYJ) or individual firms like Eaton (NYSE:ETN) make great picks.


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.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!