U.S. industrial production returned to its growth trajectory in May after a marginal gain in April. Indexes for most major market groups like consumer goods, business equipment, business supplies, and materials moved up while only construction activities contracted.
Industrial Production Surges in May
The Federal Reserve reported that industrial production gained 0.8% in May compared with a downwardly revised 0.1% in April. The consensus estimate was for an increase of 0.6%. Although the metric gained 16.3% year over year, it's still 1.4% below the pre-pandemic level of February 2020.
Meanwhile, in June, out of the three broad sectors, the manufacturing sector advanced 0.9% buoyed by the strong performance of motor vehicles and parts. Mining activities were up 1.2% while the output of utilities increased 0.2%. Capacity utilization for overall industrial production in May increased to 75.2% compared with the downwardly revised 74.6% in April. The consensus estimate was 75.1%.
Manufacturing Flourishes Despite Supply Shortage
On Jun 1, the Institute of Supply Management (ISM) reported that its manufacturing Purchasing Managers' Index (PMI) increased to 61.2% in May from 60.7% in April. The consensus estimate was 60.8%. Notably, any reading above 50% indicates expansion in manufacturing activities and a reading above 60% is generally recognized as exceptional. The reading for May reflects the 12th consecutive month of growth.
Moreover, the IHS Markit reported that the final reading of its U.S. manufacturing PMI for May came in at 62.1% compared with 61.5% in the preliminary reading and 60.5% in April. May's reading was the highest in its 14-year history.
Despite growing demand, manufacturers are facing pricing pressure due to higher input costs owing to the supply-chain destruction during the pandemic and shortage of skilled labor.
Near-Term Drivers
The United States has witnessed a sharp decline in new coronavirus cases as the government has ramped up COVID-19 vaccinations nationwide. With this, the U.S. regulatory authorities are gradually removing lockdown-related restrictions to restore normal economic activities. Most of the businesses that were closed due to lockdowns have reopened with new social distancing norms. These positives have strengthened the forward-looking sentiments of manufacturers.
As U.S. and the major global economies reopen, the manufacturing sector should strengthen. Export demand for high-tech manufacturing products of the country should also increase. The Fed is likely to keep the benchmark interest rate as low as 0-0.25% for a longer period. A low interest rate will significantly reduce the cost of capital and make U.S. currency cheaper in the foreign exchange market, making the country's products more competitively priced.
Our Top Picks
We have narrowed down our search to five industrial product stocks that have strong growth potential for the rest of 2021 and witnessed strong earnings estimates revisions in the last 30 days.
All these companies are regular dividend payers that will be useful as regular income streams during the market's downtrend. Moreover, each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past month.
Image Source: Zacks Investment Research
Emerson (NYSE:EMR) Electric Co. EMR designs and manufactures technology and engineering products for industrial, commercial, and consumer markets worldwide. It operates through the Automation Solutions, and Commercial & Residential Solutions segments.
The company has an expected earnings growth rate of 13.6% for the current year (ending September 2021). The Zacks Consensus Estimate for the current year has improved 1.6% over the last 30 days. The stock has a current dividend yield of 2.1%.
Deere (NYSE:DE) & Co. DE manufactures and distributes farm equipment worldwide. It operates through three segments: Agriculture and Turf, Construction and Forestry, and Financial Services.
The company has an expected earnings growth rate of more than 100% for the current year (ending October 2021). The Zacks Consensus Estimate for the current year has improved 10.5% over the last 30 days. It has a current dividend yield of 1.1%.
Caterpillar Inc (NYSE:CAT). CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives worldwide.
The company has an expected earnings growth rate of 46.3% for the current year. The Zacks Consensus Estimate for the current year has improved 0.6% over the last 30 days. The stock has a current dividend yield of 1.9%.
Xylem Inc (NYSE:XYL). XYL is engaged in the design, manufacture, and servicing of engineered products and solutions for the water and wastewater applications in the United States, Europe, the Asia Pacific, and internationally. It operates in three segments: Water Infrastructure, Applied Water, and Measurement & Control Solutions.
The company has an expected earnings growth rate of 33.5% for the current year. The Zacks Consensus Estimate for the current year has improved 1.9% over the last 30 days. The stock has a current dividend yield of 1%.
Parker-Hannifin Corp (NYSE:PH). PH manufactures and sells motion and control technologies and systems for various mobile, industrial, and aerospace markets worldwide. It operates through two segments, Diversified Industrial and Aerospace Systems.
The company has an expected earnings growth rate of 14.3% for the current year (ending June 2022). The Zacks Consensus Estimate for the current year has improved 0.2% over the last 30 days. The stock has a current dividend yield of 1.4%.
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