The U.S. manufacturing sector has been witnessing a resurgence under the Trump administration since 2017, shrugging off its lengthy spell of weak productivity and sluggish growth. Despite a volatile 2018, this sector has expanded and generated a good number of jobs. This trend continued in the first quarter of 2019.
Manufacturers have increased capital spending and hiring driven by the massive tax overhaul, deregulatory measures, a strong domestic economy and positive business sentiment. Notably, the manufacturing sector constitutes nearly 12% of the U.S. GDP. A solution to the U.S.–China trade war will be highly beneficial for this sector.
U.S. Manufacturing Remains Robust
On Apr 1, the Institute for Supply Management (ISM) reported that U.S. manufacturing expanded in March for the 119th consecutive month. The March index came in at 55.3, easily surpassing the consensus estimate of 54.5. Notably, the index for February was 54.2, the lowest level since November 2016.
Of the 18 manufacturing industries, 16 expanded in March. The new orders index rose to 57.4 from 55.5 in February. Production index also surged from 54.8 in February to 55.8 in March. The ISM panel cited continued expansion of business activities supported by strong demand in the form of new orders and employment.
Strong Hiring in Manufacturing Sector
According to the Department of Labor, the manufacturing sector generated 284,000 jobs in 2018, the highest since 1997. Within the sector, durable goods industries, which produce industrial intermediaries, generated nearly 89% of job additions.
The National Association of Manufacturers reported that about 500,000 manufacturing jobs are currently available in the United States. A study by the Manufacturing Institute and Deloitte has projected that by the end of 2025, the U.S. manufacturing sector will witness shortage of around 2 million skilled workers.
Positive Developments on Trade Front
On Mar 29, there was assurance from White House that trade negotiation between the United States and China has made progress in Beijing. Several positive steps have already been taken by two countries to find an amicable solution to the year-long trade conflict.
On Mar 27, Reuters reported that China has made unprecedented proposals on a range of issues including the protection of U.S. intellectual properties to resolve trade disputes. Further, on Mar 31, China’s State Council said that it will suspend the additional 25% tariffs on U.S.-made vehicles and auto parts for three months starting Apr 1. Last month, President Trump refrained from hiking tariffs from 10% to 25% on $200 billion Chinese goods for an indefinite time period.
U.S. Manufacturing Momentum to Last
Despite the Wall Street rout in 2018, the average value of the ISM manufacturing index was pegged at 58.8, reflecting robust growth in the sector. Notably, any reading above 50 indicates overall growth of the manufacturing sector and a reading above 55 hints at extraordinary growth. In the first three months of 2019, the average value of the ISM manufacturing index was pegged at nearly 55.4 despite February’s slowdown.
The U.S. economy is firmly placed on growth trajectory albeit at a slow pace. Strong manufacturing goods orders are normally associated with stronger economic activity. A possible solution to the trade conflict will significantly reduce concerns about global economic slowdown, thereby bolstering the U.S. manufacturing sector for the rest of 2019.
Our Top Picks
Considering these positives, investment in manufacturing stocks with strong growth potential appears prudent. We narrowed down our choice to five stocks each of which carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
Ingevity Corp. NGVT manufactures and sells specialty chemicals and carbon materials in the United States and internationally. The company has an expected earnings growth rate of 17.9% for the current year. The Zacks Consensus Estimate for the current year has improved 2.7% over the past 60 days.
Arista Networks Inc. ANET develops markets and sells cloud networking solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. The company has an expected earnings growth rate of 16.3% for the current year. The Zacks Consensus Estimate for the current year has improved 3.7% over the past 60 days.
Airgain Inc. AIRG designs, develops, and engineers antenna products for original equipment and design manufacturers, chipset vendors, and service providers worldwide. The company has an expected earnings growth rate of 31.8% for the current year. The Zacks Consensus Estimate for the current year has improved 20.8% over the past 60 days.
Sun Hydraulics Corp. SNHY is a leading designer and manufacturer of high-performance, screw-in hydraulic cartridge valves and manifolds which control force, speed and motion as integral components in fluid power systems. The company has expected earnings growth of 13% for the current year. The Zacks Consensus Estimate for the current year has improved 23.2% over the past 60 days.
DXP Enterprises Inc. DXPE engages in distributing maintenance, repair, and operating (MRO) products, equipment and services to energy and industrial customers in the United States. The company has expected earnings growth of 17.5% for the current year. The Zacks Consensus Estimate for the current year has improved 2.2% over the past 60 days.
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