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If the US avoids a recession, or at least a deep one, it will most likely have industrial companies to thank.
While demand is softening on the consumer side of the economy, it remains solid in manufacturing and, more importantly, appears sustainable even as buyers continue to scale back. Consider the prospects of some companies that most people pay little attention to.
Eaton Corp. chief executive officer Craig Arnold said variations of “strong” and “strength” more than 45 times during a conference call with analysts Aug. 2, and that’s not referring to the dollar. “It feels positive, too positive in some cases,” Arnold, whose company makes electrical equipment for construction, energy, automobiles, and aerospace, among other things. With a market value of around $60 billion, Eaton is not small.
Illinois Tool Works Inc., which is even bigger than Eaton, said its organic sales rose 18% year over year in July, the highest monthly growth rate for the whole year. The company makes all kinds of products for the hospitality, test and measurement, welding, construction and auto industries, and most of these areas “got off to a really strong start in Q3.”
Companies as diverse as chemical manufacturer DuPont de Nemours Inc., industrial distributor WW Grainger Inc., and a metal bender like Arconic Corp. say the same thing: The manufacturing economy is sizzling.
“The industrial parts of the economy are certainly growing for us faster than the non-industrial parts right now,” said DG Macpherson, CEO of Grainger, which sells just about any industrial-related part or device you can think of.
While the industrial economy’s strength is not new, its ability to weather a slowdown in consumer spending is a change from previous cycles.
“We strongly believe that the industrial economy will decouple from the consumer economy,” Scott Davis, an analyst at Melius Research, said in an email. “There’s just too much pent-up demand for projects and mega-projects that rely on secular rather than cyclical change.”
The reasons for this decoupling are manifold. One obvious one is the recovery in investment in the oil and gas industry. Although some industrial companies have reduced their exposure to the energy sector, particularly in near-wellhead activities, following the drop in oil prices in mid-2014, the upsurge in drilling is spreading across the industrial economy with increased demand for steel, construction, trucks and safety equipment.
Another reason is that car and heavy truck makers are still struggling to keep up with demand and have big holes in their inventories that will take a while to rebuild. According to the Bureau of Economic Analysis, there were 95,000 cars in inventory in June, up from a monthly average of 660,000 in 2019. The number of Class 8 trucks, as the big rigs are called, was behind relative to the build rate in the first six months this year’s about 10, which is down from last year, when computer chip shortages peaked, but still higher than 6.6 in 2019, according to data from FTR Associates. It’s the opposite problem of large retailers who struggle with overstocking. Commercial and private jet makers are also facing huge backlogs to fill as people, restless from Covid-19 closures, get back on the road. Construction projects are progressing, and even consumer-centric companies are continuing projects to improve their logistics, an area where costs have skyrocketed during the pandemic.
The transition to clean energy is also feeding industrial demand, and the climate change bill passed by the Senate over the weekend would keep those flames burning for some time — perhaps even during a consumer recession.
Eaton’s Arnold has positioned his company to ride the wave of demand for electric power as economies wean themselves off oil. The company has a long history of selling transformers and circuit breakers for power generation and transmission, and has recently sought to become a key supplier to electric vehicle manufacturers. The company raised its guidance for 2002 earnings per share by 4 cents to an average of $7.56 and raised its guidance for annual organic sales growth to as much as 13% from 11%.
“Despite all the talk of a possible slowdown and downturn in the market, and we’ll be ready when we have one, we’re focused on investing to capitalize on what we see as the super growth cycle that’s coming from favorable trends throughout the year is driving recovery and some of our other end markets,” Arnold said on the conference call.
Eaton, DuPont and ITW, which raised their forecasts in May, fueled international weakness due to the lockdown in China and Europe struggling with rising energy prices. Still, there are no signs of international weakness spilling over to the US. US industrial production rose more than 4% yoy in June, a solid pace and that comes on top of the big recovery of more than 9% in June last year. Ironically, the same supply chain is caught up in it. Inflation, fueled by not meeting demand, also kept in check the overstocking of vehicles, homes, electronics and other goods that would normally occur and then cause a drop in production. The trucking industry, for example, is notorious for boom-and-bust cycles because companies buy too many trucks when freight demand is strong and then have too much capacity when freight cools. These truckers were never able to buy all the trucks they wanted. There won’t be a big bust this cycle.
All in all, it makes sense that manufacturing can stimulate the economy through a drop in consumer spending.
More from other authors at Bloomberg Opinion:
• It will (still) be difficult to get a car: Anjani Trivedi
• Customer demand is there. Supply is still not: Brooke Sutherland
• New chips law could become a $280 billion boondoggle: editorial
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he was responsible for US industrial and transportation companies and Mexico’s industry, economy and government.
For more stories like this, visit bloomberg.com/opinion
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