Where America Can Get a Much-Needed Boost: Manufacturing

major players in the heavy industry segment like Caterpillar offer pockets of strengthThe limping American economy may be headed for even more trouble ahead. Unemployment remains at record levels, and some analysts are expecting more weakening in the already fragile housing sector.

But there are bright spots. After decades of languishing in an economy focused increasingly on the financial services sector, American manufacturing is experiencing a stronger rebound than most economists had anticipated.

And for U.S. manufacturers, fast-growing emerging market economies are helping to make up for lackluster demand in mature economies.

Soaring Sales in Asia-Pacific

Recent reports from major players in the heavy-industry segment like Caterpillar (CAT) reveal pockets of strength amid the broader economic malaise. Earlier this month, the company said its May sales had risen 11% from the same period last year.

The gains were powered in large part by rapidly expanding emerging economies that have ample demand for the kind of construction and mining equipment that Caterpillar builds. In 2009, 63% of its $32 billion in revenue came from overseas, and sales in the Asia-Pacific region soared 38% year-over-year.

Caterpillar expects the developed world's economies to grow at a sluggish rate of 2.5% in 2010 and the U.S. to clock in at a 3.5% rate. But it anticipates that developing economies will expand at a vibrant 6% clip.

Positive Forecasts

Shares of Caterpillar reflect that growth surge in emerging markets: They're up about 85% from a year ago, and some analysts forecast more solid business even at home.

"Looking ahead, we expect a continued recovery in both revenue and volume in 2010, driven mainly by robust growth in the Asia/Pacific region and a rebounding North American market," analysts at Argus Research noted recently.

Nor is Caterpillar the only example of U.S. manufacturing strength. Shares of Boeing (BA) have gained more than 60% from a year ago, well ahead of the 20% gains posted by the broader S&P 500 average.

Still, calls for extended stimulus spending to boost domestic demand have been on the rise. Congressional elections in November, in which incumbents are widely predicted to encounter voter fury, are adding further pressure for a quick fix. (See video below.)

Easing the Transition

But despite the pain involved, rebalancing a U.S. economy that has been fueled for decades by consumers bingeing on credit may be exactly what the country needs. Tilting the U.S. economy more toward high-end manufacturing will require plenty of investment and time. Rather than trying to prop up the economy on its previously shaky footing by simply spending more, government policymakers should focus on public assistance to make the transition to value-added manufacturing smoother for workers.

Making the tough choices to change now will lead to a more sustainable path for future growth. Pouring more funds into the existing economic setup, on the other hand, would only reinforce the bad habits that caused the Great Recession.

Vishesh Kumar discusses stimulus spending vs. manufacturing.

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