Manufacturing: Which Companies Will Recover First?

Scattered evidence of stabilization in manufacturing shouldn't be mistaken for signs of widespread recovery, economists say

By David Bogoslaw

For those encouraged by the stream of improving economic data in recent weeks, jitters are more and more giving way to confidence that the worst of the recession has been seen—and that it won't be long before signs of recovery start to appear. One example: While the Institute for Supply Management's April data showed contraction in manufacturing production for the 15th consecutive month, it was at a slower pace than in March. And a six-percentage point spike in the New Orders Index, one component within the ISM Purchasing Managers Index, puts it on the verge of showing an increase in manufacturing orders.

Restoring the manufacturing industry to health won't come easily after the 15% plunge that production took in the 12 months ended Mar. 31, the biggest one-year drop since the end of World War II, according to Charles McMillion, chief economist at MBG Information Services in Washington, D.C. The scattered evidence of stabilization across the sector shouldn't be mistaken for signs of widespread recovery anytime soon, especially given most companies' lack of any kind of pricing power, he says.

Although McMillion believes the rate of decline in production would be slowing even without the stimulus package, he worries about the impact a possibly extended shutdown of production at General Motors (GM) and Chrysler could have on auto-parts producers. "There's a lot of uncertainty coming at us as automakers try to get their inventories under control," he says.

Betting on the Government

In terms of scale, highway construction and other forms of heavy construction will probably account for the biggest portion of the rebound in manufacturing. With $27.5 billion earmarked for highway and bridge construction projects, it is the biggest single-line infrastructure item in the final version of the Obama stimulus package. A total of $80 billion has been allocated to infrastructure projects.

"Right now, the government is the horse that everybody is betting on because of the stimulus plan to start spending on roads and bridges and other activity that will help push some manufacturing production growth," says McMillion. "And the jobs that are created from that will hopefully create at least a little bit of additional consumer spending and then we can expect some business spending [on manufactured goods]."

Given how low capacity utilization rates of property, equipment, and labor are, McMillion says he doesn't expect to see much new investment in manufacturing capacity.

Hopeful Signs for Steelmakers

U.S. steelmakers such as Nucor (NUE), Steel Dynamics (STLD), and Commercial Metals (CMC) are all poised to benefit from a boom in heavy construction, since they make the long steel products used to reinforce cement and in other aspects of highway construction. Producers of flat steel products such as United States Steel (X) and AK Steel Holding (AKS) won't be as fortunate, since they are mainly suppliers to the auto industry.

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