Markets

U.S. Manufacturing: Will The Strength Continue?

By John Keefe

Updated on: October 25, 2010 / 11:32 AM EDT / MoneyWatch

Third quarter 2010 corporate earnings are showing us that the U.S. still is a manufacturing power, and that companies that make things are doing well in the world markets. Their stock prices have outperformed the broad U.S. market as well. But the macro indicators are mixed on what the rest of this year and 2011 may hold.

StarMine Professional, a service of Thomson Reuters, compiles earnings estimates by Wall Street analysts, and picks those with the best records to arrive at a Smart Estimate. For 3Q 2010, the entire industrial sector is forecast to show earnings growth of 15 percent. Construction is weak these days, and will show drops in earnings of about half, but earnings in these industries are doing very well indeed for 3Q 2010:

Air freight and logistics, up 28 percent
Building products, up 46 percent
Conglomerates, up 11 percent
Machinery, up 152 percent
Rail and road, up 34 percent

Much of the strength is coming from overseas markets. The Financial Times reports that companies have typically credited their earnings growth to strength in China and other developing Asian countries, the Middle East and Latin America.

About 25 per cent of US manufacturing output is exported, and David Huether, chief economist of the National Association of Manufacturers, calculates that the dollar is about 10 per cent undervalued relative to its long-term average, giving US exporters an advantage.

As a result, the industrial stocks are beating the general market:

But the strength of exports may not be enough to sustain flagging growth, the FT adds. Here are a few data points that suggest the industrial side may be slowing down.

First, the Ceridian-UCLA Pulse of Commerce Index, that tells us how much diesel fuel truckers are buying (the blue line). It's compared to industrial production (the gold line):

The National Association of Business Economists (NABE) reports growing demand for their businesses, and that a higher proportion of companies are expanding employment and capital spending. But they also say members are cutting their forecasts of U.S. economic growth for 2010 and 2011.

Here's the Purchasing Managers' Index from the Institute for Supply Management -- it's above 50, which means business is still expanding, but not as fast as in early 2010:

To sum up, a comparison of U.S. exports of manufactured goods with total industrial production -- mixed:

In the manufacturing world, things are still improving, and it's above average for the economy as a whole. Let's hope the economies of those developing foreign export markets keep rising.