Industry rises from the ashes to drive growth

Kathleen Brooks
AMERICAN industry appears to be benfitting from a second wind. As the world’s largest economy emerges from recession, it’s industry that’s leading the way while the service sector is only just managing to hobble back to life.

In recent years the US has re-directed its economy towards the service sector and, in particular, the consumer. At the same time, its industrial base has shrunk over the past 20 years. But, as consumers reduce their debt levels, they are hampering growth in the services sector. In contrast, conditions are ripe for industry to flourish in the medium term.

Kully Samra, from Charles Schwab, says that industrial production is benefiting from a “coiled spring” effect. US firms had cut their inventory levels to the bone during the economic downturn so now that the economy is growing again there is a rapid re-stocking taking place. This is already reflected in the economic data – industrial production rose by 0.9 per cent in January.

And there is room for further expansion. Samra notes that capacity utilisation, which measures the proportion of plants and factories in use in the US, remains fairly low at 72.6 per cent. This is below the recent average of 81.6 per cent.

This means that it’s not too late for investors to get in on the industrial trend. Using an exchange-traded fund (ETF) is one of the easier ways to do it as an investor can trade the S&P Global Industrial Index Fund – offered by ETF provider iShares – as easily as trading any stock. This fund pays dividends twice a year; the most recent yield was 1.12 per cent. If you think the US dollar will continue its upward trend then you could also benefit from a positive currency effect – the dollar is the fund’s base currency.

Other signals point to more industrial strength. Confidence within the sector is growing: Jim McNerney, head of Boeing, the aircraft manufacturer, said that he expects to see improved demand for commercial aircraft this year. He also added that there is a possibility production rates for its 737 model could increase as the global economy picks up.

An increase in demand from emerging markets is also benefiting those firms that can export their goods. For example, Deutsche Bank expects Lockhead Martin, the arms manufacturer, to supply defence equipment worth $20bn to India over the next five years.

Costly regulationary changes for the sector also appear to be on the back burner. Legislation to cut emissions in the US is currently delayed in the Senate. Likewise, the US Climate Action Partnership, the high profile lobby group that pushed for a reduction in greenhouse gas emissions, is in disarray after a number of its members left in recent weeks, including BP and Conoco Phillips.

Although the services sector is expected to pick up later this year as unemployment falls, the industrial sector has certainly shifted up a gear and gone some way to re-assert itself as a meaningful driver of US economic growth as we enter a new decade.