US Manufacturing Output Rises In August: Will The Trend Stay?

Industrial production rose 0.6% in August — the biggest gain in a year — following a dip of 0.1% in July. Manufacturing production also rose 0.5% in August after a 0.4% drop in July. Notably, factory output has increased 0.2% on average over May-Aug period after witnessing average 0.5% drop during January to April.

Production in August rose 0.5% in durable manufacturing, driven by gains across most major categories — machinery (1.6%), primary metals (1.3%), and nonmetallic mineral products (1.1%). A decline of 1% in motor vehicles and parts was a minor deterrent. Nondurable manufacturing rose 0.5% in August backed by growth of 2.6% and 1.1% in plastics and rubber products and chemicals, respectively.

Mining output increased 1.4% in August following a decline of 1.5% in July. Utility output increased 0.6%, thanks to gains in both electric and natural gas utilities.

Per the Institute for Supply Management’s report released earlier this month, the U.S manufacturing sector showed contraction in August – after exhibiting growth for 35 consecutive months. The Purchasing Managers’ Index (PMI) for August declined to 49.1% from 51.2% in July — lowest reading since January 2016’s reading of 48%.

New Orders Index registered 47.2% in August, contracting from 50.8% in July, bringing an end to 43 months of continuous expansion. Production Index came in at 49.5% in August, down from 50.8% in July, a decline following growth for 35 consecutive months. Employment Index registered 47.4% in August, down from July’s 51.7%. The index also contracted after 34 consecutive months of employment growth.

Notwithstanding the dip, the PMI has averaged 54% over the last 12 months ranging from a low of 49.1% to a high of 59.5%.

The Zacks Manufacturing - Construction and Mining industry comprises companies that manufacture and sell construction, mining, and utility equipment. The Manufacturing - Construction and Mining industry, which is part of the broader Industrial Products Sector currently, carries a Zacks Industry Rank #177, which places it at the bottom 31% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The Manufacturing - Construction and Mining industry has underperformed its own sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has fallen 17.1% compared with the sector’s decline of 11.1%. Meanwhile, the Zacks S&P 500 composite has rallied 1.4%.

The ongoing U.S-China trade tensions are weighing on manufacturing activity and inflating material costs. Given that steel is a primary raw material in manufacturing, every company bore the brunt of rising steel prices.

However, going forward improvement in its end markets like construction, mining will drive the industry. Per Statista, new construction spending in the United States is projected to grow from $1.29 trillion in 2018 to $1.45 trillion in by 2023. Residential construction and non-residential construction spending are projected at approximately $586 billion and slightly more than $590.4 billion, respectively, in 2023.

Investors interested in the industry may consider H&E Equipment Services, Inc. (NASDAQ:HEES) sporting a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

This Baton Rouge, LA-based company has a positive average earnings surprise history of 28.59% over the trailing four quarters. The Zacks Consensus Estimate for 2019 earnings per share (EPS) suggests year-over-year growth of 15.96%. The company has an estimated long-term earnings growth rate of 10.66%.

Investors may also consider Zacks Ranked #3 (Hold) stocks like Caterpillar Inc. (NYSE:CAT) and The Manitowoc Company, Inc. (NYSE:MTW) . The earnings estimates for the current fiscal and next, for both of these companies indicate positive growth. These companies also have a positive average earnings surprise history.

However, investors should steer clear of Astec Industries Inc. (ASTE) and Terex Corporation (TEX), both of which have a Zacks Rank #4 (Sell) and negative earnings growth projections for this year.

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