U.S. manufacturing sector is witnessing resurgence under the Trump administration since last year, shrugging off its long phase of weak productivity and sluggish growth. In fact, U.S. manufacturers are increasing capital spending and hiring on the back of massive tax overhaul, deregulatory measures, strong domestic and global economy and robust business sentiment.
Worldwide demand for manufacturing products is on the rise. Under Trump’s Presidency, the U.S. manufacturing sector has bolstered business spending at factories for expensive durable items such as machinery and vehicles.
This trend is likely to be fueled further backed by a massive infrastructure overhaul proposed by the government. At this stage, investment in manufacturing stocks with favorable Zacks Rank will be a prudent move.
Robust ISM Manufacturing Reading for May
On Jun 1, the Institute for Supply Management (“ISM”) reported that manufacturing index for the month of May jumped to 58.7 from 57.3 in April. The May reading was also better than the consensus estimate of 58.2 and the highest in two months.
Notably, a reading of more than 50 indicates that the sector is expanding. May 2018 also marked the 21st consecutive month of expansion for the U.S. manufacturing sector.
The new-orders index rose 2.5 points to 63.7%, the production index gained 4.3 points to 61.5%. Similarly, the employment index also improved to 56.3%. In fact, of the 18 manufacturing industries, 16 reported growth in May while none reported a decrease in PMI in May compared with April. This clearly indicates that the U.S. heavy industrial sector is forging ahead with a strong momentum.
Strong Hiring in Manufacturing Sector
According to the Department of Labor, manufacturing added 18,000 jobs in May which increased 12-months job addition to 259,000. In the first quarter of 2018, the sector added 74,000 jobs on average per month.
This represents 36.6% of the average monthly job additions of the U.S. labor market. The Department of Labor also revealed that jobs in the manufacturing industry have grown 2.7% since November 2016, when Trump was elected President.
Massive Tax Overhaul, Proposed Increase in Infrastructure Spending
Newly introduced tax-reforms and deregulation policies are likely to act as a major catalyst. The corporate tax rate was lowered from 35% to 21% and offered an additional tax break on repatriated overseas profits of U.S. corporations.
Additionally, the government has taken a decision to spend a whopping $1.5 trillion on several infrastructure projects like constructing new roads, bridges, highways, railways and waterways across the country over a period of 10 years. This project will generate significant demand for manufacturing sector.
Our Top Picks
The manufacturing sector accounts for nearly 12% of the U.S. GDP. In fact, strong manufacturing goods orders are normally associated with stronger economic activity. At present, the U.S. economy is firmly placed on growth trajectory.
Considering these positives, investing in manufacturing stocks with strong growth potential will be a wise decision. We narrowed down our choice to five stocks each of which carries a Zacks Rank #1 (Strong Buy).
The chart below shows price performance of our five picks in the last three months.
Caterpillar Inc. (NYSE:CAT) is a leading global manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.
Caterpillar has expected earnings growth of 55.8% for current year. The Zacks Consensus Estimate for the current year has improved by 17.4% over the last 60 days.
Terex Corporation (NYSE:TEX) is a global manufacturer of lifting and material processing products as well as services that deliver lifecycle solutions to maximize customer return on investment.
Terex has expected earnings growth of 114.1% for current year. The Zacks Consensus Estimate for the current year has improved by 14.7% over the last 60 days.
Timken Co (NYSE:TKR) engineers, manufactures and markets bearings, transmissions, gearboxes, belts, chain and related products along with offering a spectrum of powertrain rebuild and repair services.
Timken has expected earnings growth of 50.6% for current year. The Zacks Consensus Estimate for the current year has improved by 11.3% over the last 60 days.
Graco Inc. (NYSE:GGG) is a leading provider of premium pumps and spray equipment for fluid handling in the construction, manufacturing, processing and maintenance industries.
Graco has expected earnings growth of 32.2% for current year. The Zacks Consensus Estimate for the current year has improved by 6.2% over the last 60 days.
Twin Disc, Incorporated (NASDAQ:TWIN) designs, manufactures and sells heavy duty off-highway power transmission equipment.
Twin Disc has expected earnings growth of 319.5% for current year. The Zacks Consensus Estimate for the current year has improved by 104.5% over the last 60 days.
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