We’ve been hearing a lot about a “comeback” or even a “renaissance” in U.S. manufacturing this year.
Is it real?
Well, it depends on what you mean.
So far, there hasn’t been much of a revival in manufacturing jobs. Take a look at the chart of U.S. manufacturing payrolls — any gains will pale in comparison to where we once were:
But in recent notes, Wells Fargo’s John Silvia and Mackenzie Miller and Allianz’ Kelly Smith show that manufacturing is once again profitable — and while firms may not be ramping up hiring, they are helping to drive U.S. growth and stocks higher.
“Manufacturing profits adjusted for inventory valuation improved nearly 4% YOY to $US1.333 billion in Q2 2013,” said Miller and Silvia.
At 8.5 cents on the dollar, profit margins are back to pre-recession levels:
In fact, there’s probably a correlation between higher profits and slower hiring.
“The economic expansion of 2009-2013 has been characterised by modest gains in employment and stronger gains in productivity such that increases in unit labour costs have been modest, thereby leading to improved margins,” they wrote.
Balance sheets have also improved, they note. Current assets to current liabilities, which which helps measure a firm’s ability to withstand short-term financial distress if earnings decline, has stabilised at 1.37. Equity to debt ratios of 0.79 are back to pre-recession levels.
And in the last few years manufacturers have increased their ratio of long-term debt, meaning they’re better insulated from near-term changes in interest rates.
The Wells team’s conclusion is simply that manufacturing firms are on more a solid financial footing, setting them up for further growth.
Allianz’s Smith says recent strong manufacturing data has helped stocks rally:
“…it was a strong October ISM manufacturing report that moved stocks higher last Friday. At 56.4, it beat consensus expectations and edged above the previous month’s reading. Specifically, new orders posted their third consecutive reading above 60 while production posted its fourth straight reading over 60.”
This “mini-resurgence” in manufacturing has been driven by lower energy prices, a stronger dollar and subdued labour costs, she writes.
And the gains could even translate into more hiring: Smith notes the Boston Consulting Group has suggested increased exports helped in part from manufacturing could yield 5 million jobs by 2020.
“Maybe manufacturing expansion can provide the growth handoff needed to sustain the economy after the Fed ends its QE stimulus program. If nothing else, then manufacturing may serve as a boon for the stock market and offset some of the headwinds facing the economy right now.”
U.S. manufacturing is unlikely to be what it once was, but it seems like there’s some room to run.