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Analysis | Industrials' Long Coattails Can Carry the US Economy – The Washington Post

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If the US avoids a recession, or at least a deep one, it will most likely be able to thank industrial companies.

While demand on the consumer side of the economy is weakening, it remains solid in the manufacturing sector and, more important, appears to be sustainable even if shoppers cut back further. Consider the outlook from a few companies most people pay little attention to.

Eaton Corp. Chief Executive Officer Craig Arnold said variations of  “strong” and “strength” more than 45 times during a conference call with analysts on Aug. 2, and that’s not counting references to the dollar. “It feels positive, in some cases, too positive,” Arnold, whose company makes electrical gear for construction, power, autos and aerospace, among other goods. With a market value of about $60 billion, Eaton isn’t small.

Illinois Tool Works Inc., which is even larger than Eaton, said its organic sales were up 18% in July from a year earlier, the highest monthly growth rate all year. The company makes all kinds of products for the food service, test and measurement, welding, construction and auto industries, and most of those areas are “off to a really strong start in Q3.”

Companies as diverse as chemical maker DuPont de Nemours Inc., industrial distributor W.W. Grainger Inc. and a metal-bender like Arconic Corp. are saying the same thing: The manufacturing economy is sizzling.

“The industrial parts of the economy are certainly growing faster for us than the non-industrial parts right now,” said DG Macpherson, CEO of Grainger, which sells just about any industrial-related part or gadget you can think of.

While the strength of the industrial economy isn’t new, its ability to power through a downturn in consumer spending is a change from past cycles.

 “We strongly believe that the industrial economy will decouple from the consumer economy,’’ Scott Davis, an analyst with Melius Research, said in an email. “There’s just too much pent-up demand for projects and megaprojects that are based more on secular changes than cyclical.”

The reasons for this decoupling are multifold. An obvious one is the recovery of investment in the oil and gas industry. Although some industrial companies pulled back exposure to energy, especially in activity closer to the wellhead, after oil prices sank in mid-2014, the increase in drilling reverberates broadly through the industrial economy with increased demand for steel, construction, trucks and safety equipment.

Another is that the makers of autos and heavy trucks are still struggling to keep up with demand and have huge holes in their inventories that will take a while to rebuild. There were 95,000 cars in inventory in June, down from a monthly average of 660,000 in 2019, according to the Bureau of Economic Analysis. The number of Class 8 trucks, as the big rigs are known, in backlog as a ratio of the build rate was about 10 for the first six months this year, which is lower than last year when the computer-chip shortage was at its peak, but still higher than 6.6 in 2019, according to FTR Associates data. It’s the opposite problem from large retailers, which are grappling with too much inventory.Makers of commercial and private jets also have big backlogs to fill as people, restless from the Covid-19 shut-ins, are on the move again. Construction projects are moving forward, and even consumer-facing companies are continuing with projects to improve their logistics, an area where costs jumped during the pandemic.

The transition to cleaner energy also is also feeding the fire of industrial demand, and the climate change bill passed by the Senate over the weekend would keep those flames burning for some time — perhaps even through a consumer recession.

Eaton’s Arnold has positioned his company to ride the wave of electrical power demand as economies wean themselves off oil. The company has a long history of selling transformers and circuit breakers for power generation and transmission and recently made a push to become a key supplier to electric vehicle manufacturers. The company boosted its 2002 earnings-per-share guidance by 4 cents to a midpoint of $7.56 and increased its forecast for annual organic sales growth to as much as 13% from 11%.

“So despite all the talk about potential slowdown and downturn in the market, and we’ll be ready if we have one, we’re focused on investing to capitalize on what we see as the super growth cycle, driven by favorable trends in the recovery and some of our other end markets,’’ Arnold said on the call.

Eaton, DuPont and ITW, which raised its guidance in May, called out international weakness from the China lockdowns and Europe’s difficulties with soaring energy prices. Still, there are no signs the international weakness is bleeding over to the US. The year-over-year increase in US industrial production in June was more than 4%, a solid pace, and that comes on top of the big rebound of more than 9% in June last year.Ironically, the same supply chain snags that stoked inflation because demand wasn’t being met also kept a lid on the overbuilding of vehicles, homes, electronics and other goods that normally would occur and then cause a pullback in output. The trucking industry, for example, is notorious for the boom-and-bust cycles because companies buy too many trucks when freight demand is strong and then have too much capacity when cargo cools. Those truckers were never able to purchase all the trucks they wanted. There will be no big bust this cycle.

Add it all up, and it makes sense that the manufacturing industry can buoy the economy through a downturn in consumer spending.

More From Other Writers at Bloomberg Opinion:

• It’s (Still) Going to Be Hard to Get a Car: Anjani Trivedi

• Customer Demand Is There. Supply Still Isn’t: Brooke Sutherland

• New Chips Act Could Become a $280 Billion Boondoggle: Editorial

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government.

More stories like this are available on bloomberg.com/opinion

©2022 Bloomberg L.P.

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German Economy Seen Shrinking Next Year Due to Energy Crisis – BNN Bloomberg

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(Bloomberg) — Germany’s economy will likely contract by 0.4% next year due to the impact of the energy crisis, according to the nation’s leading research institutes, who slashed their forecast from April of a 3.1% expansion.

German output will be €160 billion ($154 billion) lower this year and next than projected five months ago partly due to the drastic increase in energy costs, the four institutes predicted Thursday in a twice-yearly report which the government uses as guidance for its own outlook.

“The Russian attack on Ukraine and the resulting crisis on the energy markets are leading to a noticeable slump in the German economy,” said Torsten Schmidt, head of economic research at the RWI Institute and spokesman for the Joint Economic Forecast Project Group.

Germany is one of the countries hardest hit by the energy emergency triggered by the Ukraine war thanks to a reliance on Russian fuel imports built up over decades. Chancellor Olaf Scholz’s ruling coalition is racing to cut back that dependence but Germany still faces a tough winter with the prospect of gas rationing and blackouts.

The government has assembled three packages of aid measures worth nearly €100 billion to offset the impact on households and companies but has also cautioned that it doesn’t have the resources to ease the pain completely.

“Record inflation rates, especially exploding energy prices, are hitting many companies hard,” Martin Wansleben, managing director of the DIHK industry lobby, said Thursday in an emailed statement.

“The consequences are production stops, losses in value creation, the relocation of production abroad and even plant closures,” he added. “The number of companies that either do not receive any energy supply contracts at all or only receive them at extreme prices is currently increasing.”

Although the energy crunch is expected to ease over the medium term, gas prices are likely to remain well above pre-crisis levels, meaning “a permanent loss of prospe­rity for Germany,” the institutes warned.

They cut their growth estimate for this year to 1.4% from 2.7% and said they expect inflation to accelerate in coming months, climbing to an average rate of 8.8% next year — compared with 8.4% this year — before gradually falling back toward 2% in 2024.

Europe’s biggest economy will likely return to growth in 2024, with expansion of 1.9%, the institutes predicted.

The four institutes which compile the twice-yearly forecasts are Munich-Based Ifo, the IfW in Kiel, the IWH in Halle and the Essen-based RWI. The Wifo and the IHS institutes in Vienna also contribute. The government is expected to publish updated economic projections next month.

(Updates with industry lobby comment from sixth paragraph)

©2022 Bloomberg L.P.

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U.S. economy shrinks at 0.6% annual rate in Q2 – Advisor's Edge

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Consumer spending grew at a 2% annual rate, but that gain was offset by a drop in business inventories and housing investment.

The U.S. economy has been sending out mixed signals this year. Gross domestic product, or GDP, went backward in the first half of 2022. But the job market has stayed strong. Employers are adding an average 438,000 jobs a month this year, on pace to be the second-best year for hiring (behind 2021) in government records going back to 1940. Unemployment is at 3.7%, low by historic standards. There are currently about two jobs for every unemployed American.

But the Fed has raised interest rates five times this year — most recently Sept. 21 — to rein in consumer prices, which were up 8.3% in August from a year earlier despite plummeting gasoline prices. Higher borrowing costs raise the risk of a recession and higher unemployment. “We have got to get inflation behind us,” Fed Chair Jerome Powell said last week. “I wish there was a painless way to do that. There isn’t.”

The risk of recession — along with persistently and painfully high prices — poses an obstacle to President Joe Biden’s Democrats as they try to retain control of Congress in November’s midterm elections. However, drops in gasoline prices have improved consumers’ spirits in the past two months.

Thursday’s report was the Commerce Department’s third and final take on second-quarter growth. The first look at the economy’s July-September performance comes out Oct. 27. Economists, on average, expect that GDP returned to growth in the third quarter, expanding at a modest 1.5% annual pace, according to a survey by the data firm FactSet.

Commerce also on Thursday released revised numbers for past years’ GDP. The update showed that the economy performed slightly better in 2020 and 2021 than previously reported. GDP rose 5.9% last year, up from the previously reported 5.7%; and, pounded by the coronavirus pandemic, it shrank 2.8% in 2020, not as bad as the 3.4% previously on record.

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Canada's economy grew by 0.1% in July, bucking expectations it would shrink – CBC News

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Canada’s gross domestic product expanded by 0.1 per cent in July, besting expectations of an imminent decline, as growth in mining, agriculture and the oil and gas sector offset shrinkage in manufacturing.

Statistics Canada reported Thursday that economic output from the oilsands sector increased sharply, by 5.1 per cent during the month. That was a change in direction after two straight months of decline, which brought second-quarter growth to 4.2 per cent thus far. 

The agriculture, forestry, fishing and hunting sector led growth with 3.2 per cent. Unlike the United States and Europe, both of which are facing drought conditions, Canada has had a good year for crop production said Scotiabank economist Derek Holt. 

On the downside, the manufacturing sector shrank by 0.5 per cent, its third decline in four months. Canada’s export market with the United States has softened and global supply chain issues linger, said Holt. The latter are gradually easing, which could create a better picture for the sector in the second half of the quarter. 

Wholesale trade shrank by 0.7 per cent, and the retail sector declined by 1.9 per cent. That’s the smallest output for retail since December. 

“What happened this summer was a big rotation away from goods spending towards services spending,” Holt said. Activities like haircuts, travel or outings to the theatre, made popular with the lifting of pandemic restrictions, leave out retail.

While the economy eked out slight growth in July, the data agency’s early look at August’s numbers shows no growth.

“The economy fared better than anticipated this summer, but the showing still wasn’t much to write home about,” said economist Royce Mendes with Desjardins. “While the data did beat expectations today, the numbers didn’t move the needle enough to see a material market reaction.”

The performance of Canada’s economy throughout the fiscal year — 3.6 per cent growth in Q1 and 4.2 per cent thus far in Q2 — remains one of the best in the world, Holt said. 

Mendes said he expects growth will stay under one per cent this year: half of the Bank of Canada’s two per cent prediction and a third of the growth seen in the first two quarters. 

“We’re definitely slowing, and more of that is coming in a lagged response to higher interest rates and all the challenges of the world economy,” Holt said. “But relative to the rest of the world, for the year as a whole, Canada has been in a sweet spot.”

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