U.S. Manufacturing Is Building Hopes for Earnings -- and Jobs

Factory worker in U.S. manufacturing plant
Factory worker in U.S. manufacturing plant

With growing instability in the Middle East and divisive union conflicts taking shape in America's state capitals, investors are desperate for some good news. That's why the U.S. manufacturing sector is a sight for sore eyes: After more than a year of expansion, it's still growing, as American factories continue to churn out the equipment, machines and products that emerging-market nations need to develop their infrastructures.

But it's not all wine and roses in manufacturing. One of the most comprehensive reports recently offered a lukewarm assessment of the sector. According to the U.S. Federal Reserve, industrial production unexpectedly fell 0.1% in January; economists had expected an 0.5% rise. But even this bad news was mitigated by the fact that the production dip was concentrated in utilities and mining, while production in manufacturing actually rose 0.3%.

ISM Factory Index at Nearly Seven-Year High

The Institute for Supply Management's February manufacturing index left no doubt concerning the status of the industrial rebound. Aided by increasing strength in exports, manufacturing grew at a faster rate last month, with the index hitting 61.4, its highest level in about seven years. It was also 19th consecutive month of expansion.

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In fact, every key index component except one rose in February. The closely watched new-orders component -- a gauge of future business demand -- rose to 68 from 67.8, after jumping 5.8 points in January. At the same time, employment and production components also increased, with each component continuing to signal an expansion.

Even the bad news had a silver lining: Although the inventories component fell from 52.4 to 48.8 in February, the decline amid rising orders suggests that supply-chain inventories are being drawn down. They will, of course, need to be replenished, which is good news for manufacturing employment growth in the immediate quarters ahead.

When it came to jobs, things also looked up in February. According to ADP's Private Payroll report, February was the fourth straight month in which manufacturers added jobs. With the addition of 20,000 jobs, manufacturing has added 92,000 people payrolls since October 2010.

Philly Fed Survey: Factory Hiring Ahead

The Federal Reserve Bank of Philadelphia's regional economic survey, commonly known as the Philly Fed survey, was also optimistic. In February, its regional manufacturing index skyrocketed from 19.3 to 35.9, exploding past the 22 that Bloomberg estimated. Beyond the good news for the Philly Fed region, this also bodes well for manufacturing in general, demonstrating that the expansion is not just Midwest-based or U.S. auto sector-based, but far more wide-reaching.

At the same time, the Philly Fed survey's employment component jumped 6 points to 23.6 -- reaching its highest level since May 1973. Also, 58.5% of businesses surveyed indicated that they expect their business activity to increase in the six months ahead.

Taken as a whole, the latest data show a U.S. industrial core that continues to hum, with the manufacturing expansion being propelled largely by emerging-market demand. Products such as electric utility generators produced by General Electric (GE), commercial airplanes manufactured by Boeing (BA) and tractors and other agriculture equipment produced by Caterpillar (CAT) and Deere (DE) are in demand in emerging markets such as India, Brazil, Mexico and Argentina as they build out the infrastructures needed to run a modern economy. At the same time, industrial demand in the U.S. has added another, modest tailwind to the sector.

Investors Shouldn't Ignore Manufacturing Expansion

The bottom line for U.S. investors? Investors don't have to go far to read about problems and concerns that could hurt the U.S. economy. Political and social change is sweeping through the Middle East, pushing the price of oil -- the world's most vital commodity -- above $104 per barrel. In the U.S., Democrats and Republicans still haven't agreed on a full-year federal budget, and a government shutdown is possible. And in selected state capitals, the parties disagree on the right of workers to bargain collectively.

But for savvy investors who can look past the depressing front page of the newspaper, there are bright opportunities ahead. Over the next year -- and possibly longer -- a strong U.S. manufacturing sector is poised to increase both jobs and corporate earnings.

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