Fresh data from the Institute of Supply Management released on Monday showed that the manufacturing sector is in fine fettle. The institute’s manufacturing index hit a record level in June, well above that observed immediately after the presidential election of 2016. Instead of being based merely on positive sentiment, manufacturing data is now being bolstered by recently released data which hints at a pickup in GDP.
As of date, the ISM Manufacturing index has expanded for 10 successive months with the latest report reflecting broad based improvement across most sectors. The report also reveals that a strong uptick in demand has taken place, which is why it would be prudent to invest in select manufacturing stocks going into the second half of 2017.
Sharpest Growth in Three Years
In June, the ISM Manufacturing Index increased from 54.9 to 57.8, its highest level since August 2014. It is also significantly higher than the estimated level of 55.1. This increase of 2.9 points represents the largest expansion witnessed since the first half of 2013. More importantly, growth was witnessed across 15 of the 18 industries which form part of the survey, indicating that the expansion was broad based in nature.
Delving into the details, the New Orders Index increased from 59.5 in May to 63.5 in June. The Production Index increased from 57.1 to 62.4 while the Employment Index gained 3.7 points, rising from 53.5 to 57.2. The New Export Orders Index increased from 57.5 to 59.5.
An increase in order backlogs was experienced, with the associated index rising from 55 to 57. At the same time the prices index fell from 60.5 to 55, the lowest witnessed since November, indicating that raw materials prices are rising at a slower rate now.
Economic Growth Likely to Pick Up
Even though manufacturing makes up only 12% of total economic activity, its fortunes are used to gauge those of the broader economy. Given the improvement in the report’s Employment Index, jobs growth likely rebounded last month following a decline in May. Data to be released by the Department of Labor is likely to reflect this fact and most estimates put June’s job gains above 170,000, significantly higher than May’s level of 138,000.
And unlike the period immediately after the presidential elections, June’s manufacturing gains and indications of wider economic improvement are backed up official and more well recognized indicators. In the first quarter, U.S. GDP increased by 1.4% according to the Department of Commerce’s third and final estimate, which, though modest, came in above earlier estimates.
It is now widely believed that the economy picked up pace in the second quarter. Fresh data from the Atlanta Federal Reserve’s GDPNow model predicts that growth hit a 3% pace during this period. Last month’s durable orders report was dismal but still showed that production of durable goods had increased by 2.8% over the first five months of this year.
Manufacturing Awaits Policy Initiatives
Prior to 2016, manufacturing had suffered years of stagnation due to a drop in worldwide demand, a decline in oil prices and a surging dollar. However, the sector staged a steady recovery in 2016 and continues to expand, regardless of the recent drop in oil prices. The only missing link at this point seems to be the plethora of policy promises which President Trump had reiterated during his presidential campaign.
Now, industry insiders claim that June’s pickup in the ISM Index is particularly notable because it has occurred without the promised policy level boost. In recent months, the Trump administration has faced fierce opposition in its attempts to enact policy changes. As a result, the manufacturing sector continues to wait for a clearer position on regulations, taxes and tariffs on imports.
However, in a recent article, Vice President Mike Pence was quick to point out that during the first five months of Trump’s tenure, manufacturing had added 55,000 new jobs. Pence also claimed that Trump has cut regulations to the extent that businesses in the U.S. will now enjoy savings of $18 billion every year. Additionally, Trump has approved the Dakota and Keystone pipelines, exited the Paris Accord and is rolling back the Clean Power Plan, all of which Pence claims will significantly aid manufacturing.
June’s reading of the ISM Manufacturing Index indicates that the sector has experienced a notable improvement. The report also signals a pickup in broad based economic growth which is likely to boost the sector in the months ahead.
Picking up select manufacturing stocks looks like a prudent option at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Lakeland Industries, Inc. LAKE is a manufacturer and seller of products for the industrial and public protective clothing segment.
Lakeland Industries has expected earnings growth of 56.6% for the current year. Its earnings estimate for the current year has improved by 9.2% over the last 30 days. The stock has returned 40.4% year to date, easily outperforming the Zacks
Security And Safety Services industry, which has gained 9.8% over the same period. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Allegion plc ALLE is a leading global provider of security products and solutions for business and domestic purposes.
Allegion has a Zacks Rank #2 (Buy). Its expected earnings growth for the current year is 10.9%. Its earnings estimate for the current year has improved by 0.3% over the last 30 days. The stock has returned 27.1% year to date, easily outperforming the Zacks
Security And Safety Services industry, which has gained 9.8% over the same period. Avery Dennison Corporation ( AVY Quick Quote AVY - Free Report) produces pressure-sensitive materials, and a variety of tickets, tags, labels and other converted products.
Avery Dennison has a Zacks Rank #2. Its expected earnings growth for the current year is 13.9%. Its earnings estimate for the current year has improved by 0.1% over the last 30 days. The stock has returned 26.6% year to date, outperforming the Zacks
Office Supplies industry, which has gained 18.3% over the same period. Barnes Group Inc. B is a global industrial and aerospace manufacturer and service provider, serving a wide range of end markets and customers.
Barnes Group has a Zacks Rank #2. The company has expected earnings growth of 10% for the current year. Its earnings estimate for the current year has improved by 0.1% over the last 30 days. The stock has returned 24.5% year to date, outperforming the Zacks
Manufacturing - General Industrial sector, which has gained 14.6% over the same period. Pentair plc PNR operates as a diversified industrial manufacturing company in the U.S., Europe, and internationally.
Pentair has a Zacks Rank #2. The company has expected earnings growth of 15.5% for the current year. Its earnings estimate for the current year has improved by 0.2% over the last 30 days. The stock has returned 19.5% year to date, outperforming the Zacks
Manufacturing - Thermal Products sector, which has gained 17.9% over the same period. Today's Stocks from Zacks' Hottest Strategies It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.
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