Bloomberg News

Credit Managers for Manufacturers See Less U.S. Recession Risk

October 12, 2011

Oct. 12 (Bloomberg) -- The U.S. manufacturing industry rebounded in September from its lowest level since December 2009, helping to defy concerns about a double-dip recession.

The Credit Managers’ Manufacturing Index rose last month to 53.3 from 52.1 in August, as its gauge of sales jumped to the highest since April, according to the National Association of Credit Management’s monthly survey of 600 executives.

The increases represent a “vast improvement,” said Chris Kuehl, economic adviser for the Columbia, Maryland-based association. “The doldrums that sank the manufacturing community in the summer appear to be lifting.”

The Industrial Select Sector SPDR Fund also is stabilizing after a “significant breakdown,” said Michael A. Gayed, chief investment strategist at Pension Partners LLC. The exchange- traded fund -- which includes United Technologies Corp. and 3M Co. -- fell 22 percent between July 1 and Aug. 18, compared with a 14 percent fall for the SPDR Standard & Poor’s 500 ETF, Bloomberg data show.

Since then, the industrial fund has risen 6 percent, compared with 5 percent for the S&P fund.

Following this summer’s underperformance of industrials relative to the broader market, the sector may be poised to outperform again, said Gayed, whose New York firm oversees $140 million in assets. That’s because investors have discounted an economic slowdown that’s “too extreme” as prospects for a recession grow less likely, he said.

Credit managers offer a leading indicator of the manufacturing industry because “they live in the future,” forecasting whether their customers can pay invoices as many as four months from the survey date, Kuehl said.

‘Big Bounce Back’

The Institute for Supply Management’s manufacturing index also rebounded in September after falling the prior month to the lowest since July 2009. Following two consecutive months of decline, the “big bounce back” indicates the modest U.S. recovery is “still alive,” said Ellen Zentner, senior U.S. economist at Nomura Securities International Inc. in New York.

These indexes “track the broader economy fairly well,” and last month’s improvements demonstrate that manufacturing activity is holding steady, Zentner said. Even during a “horrific” August, both indexes remained above 50, indicating growth. This “showed amazing resilience in the face of a storm of negative impacts to the U.S. economy.”

The credit managers’ index indicates demand for new machinery is beginning to “pick up steam,” said Kuehl, who is also the economist for the Fabricators & Manufacturers Association. The Rockford, Illinois-based organization is co- sponsoring next month’s FABTECH, North America’s largest metal- forming, fabricating and welding conference, which is forecast to set an attendance record, he said.

‘Ready to Buy’

“Several manufacturers are already anticipating it will be one of their best-selling shows since 2007,” Kuehl said. More than 36,000 people have registered, up from last year’s 27,000, “a sign people are ready to buy.”

Bystronic Inc. will spend at least 50 percent more exhibiting at this year’s conference than in 2009 because “we’re having a good year,” said President Robert St. Aubin. The Elgin, Illinois-based manufacturer’s unit orders through August are up about 85 percent this year, compared with about 75 percent for the entire sheet-metal industry, he said.

The company, a subsidiary of Switzerland-based Bystronic Laser AG, makes machine tools for a “very diverse” client base that includes Deere & Co. and Case New Holland Inc., St. Aubin said. As a result, its order activity tends to be a “canary in the coal mine” for the broader economy.

‘Rather Steady’ Orders

Orders for laser-cutting equipment also have “remained rather steady” for the past 14 months at Mazak Optonics Corp., another exhibitor at FABTECH, said President Bill Citron. The Elgin-based manufacturer, a division of Japan’s Yamazaki Mazak Corp., sees no indication of deteriorating demand from customers including agricultural, mining and construction businesses -- a “microcosm of the economy,” he said.

“Companies are looking at what growth plans are going to be and will make plans irrespective” of where the stock market is trading, Citron said. While the number of units sold for the fabricating-machinery industry as a whole was “fairly mediocre” in 2010, this year has “really taken off,” he said.

Total company orders at Emerson Electric Co. “continued to reflect strength,” rising as much as 15 percent in the three months ending in August compared with last year, the St. Louis- based maker of electrical products said in a Sept. 20 statement.

Lingering Weakness

There’s still some lingering vulnerability in the manufacturing industry, according to Nomura’s Zentner. New orders were unchanged from August, and an increase in production was “propped up” by a drawdown in the backlog of orders, she said.

“Some of the forward-looking indicators suggest there’s still weakness ahead,” Zentner said. “We’re not out of the woods yet.”

July and August “were very concerning” for Honeywell International Inc.’s Automation and Control Solutions division, Roger Fradin, president and chief executive officer of the Morris Township, New Jersey-based business unit said at a Sept. 27 conference hosted by Oppenheimer & Co. Still, September was “much better” and “industrial markets are doing just fine,” he said.

As manufacturers including Honeywell’s safety-products unit prepare their exhibits for prospective buyers in Chicago next month, Bystronic’s St. Aubin expects his company will “get a significant return on investment” in terms of future sales.

“From our perspective, there’s no sign of a double-dip recession,” he said.

--Editors: Melinda Grenier, Daniel Moss

To contact the reporter on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net

To contact the editor responsible for this story: Anthony Feld at afeld2@bloomberg.net


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