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U.S. Factories Pick Up, Manufacturing Recession Overstated

Tirthankar Chakraborty

Economic output, quite alarmingly, shrank for two straight quarters this year. Many market pundits started to believe that manufacturing is in recession. However, industrial output rebounded in August and registered its largest increase in a year. Banking on such better-than-expected manufacturing numbers, top manufacturers are well poised to ramp up profits.

Is a Manufacturing Recession on the Anvil?

Manufacturers added a paltry 3,000 jobs in August, a tell-tale sign that factories were affected by the trade war and slowdown in global economic growth. Mark Hamrick, a senior economic analyst at Bankrate.com, added that “just over a year ago, manufacturing was the star pupil sector of the U.S. economy, producing more jobs than had been expected; it’s turned into a problem child, and it's not necessarily a stellar performer in employment data.”

To make things worse, the Federal Reserve data showed that manufacturing sector contracted in both the January through March and April-through-June periods. What’s more, the Institute of Supply Management, an association of purchasing managers, showed that new factory orders fell sharply last month.

Of course, such a discouraging trend raises concerns about the overall strength of the economy and not to mention President Trump’s re-election chances. After all, Trump’s main objective was to revive American manufacturing. He had signed steep tax cuts into law only to spur investment in the manufacturing sector.

Industrial Production Jumps — A Welcome Sign of Resilience

Things, however, are looking up for the manufacturing sector. And why not? The Federal Reserve recently said that industrial production, a measure of factory, mining and utility output, increased at a seasonally adjusted rate of 0.6% in August compared to the prior month. The reading was well above analysts’ expectation of a 0.2% increase.

The Fed further added that output at U.S. factories increased an average 0.2% a month over the past four months after declining an average 0.5% a month during the first four months of the year. The mining index, which includes oil and natural gas extraction, also went up 1.4% in August after dropping 1.5% in July as Hurricane Barry affected oil rigs in the Gulf of Mexico. By the way, output in the volatile mining sector jumped 5.1% from a year ago.

Adding to the positives was an uptick in utility production. Capacity utilization increased to 77.9% in August, its highest level since March. Needless to say, the industrial output and capacity utilization report runs counter to earlier signs of weakness in the manufacturing sector.

5 Winners

As the key measure of U.S. factory, mining and utility output surpassed expectations, industrial stocks in particular are expected to gain. We have, thus, selected five such stocks that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).

AGCO Corporation AGCO manufactures and distributes agricultural equipment and related replacement parts. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 3.3% in the last 60 days. The company’s expected earnings growth rate for the current year is 30.6% against the Manufacturing - Farm Equipment industry’s projected decline of 4.6%.

Century Aluminum Company CENX produces standard-grade and value-added primary aluminum products in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up more than 100% in the last 60 days. The company’s expected earnings growth rate for the next quarter is 120.9% against the Metal Products - Procurement and Fabrication industry’s estimated rally of 73.3%.

Mueller Industries, Inc. MLI manufactures and sells copper, brass, aluminum, and plastic products in the United States. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 4.8% in the last 60 days. The company’s expected earnings growth rate for the current quarter is 29.4% against the Metal Products - Procurement and Fabrication industry’s expected decline of 30.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

UFP Technologies, Inc. UFPT designs and converts foams, plastics, composites, and natural fiber materials for the medical, automotive, consumer, electronics, industrial, and aerospace and defense markets in the United States. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 2.3% in the last 60 days. The company’s expected earnings growth rate for the current year is 8.1% against the Containers - Paper and Packaging industry’s projected rally of 4.1%.

Zebra Technologies Corporation ZBRA designs, manufactures, and sells a range of automatic identification and data capture products. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has moved up nearly 2% in the last 60 days. The company’s expected earnings growth rate for the current year is 18.3% against the Manufacturing - Thermal Products industry’s projected rally of 10.2%.

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