Factory owners are benefiting from the greatest convergence of pro-industry forces in decades
ON MARCH 21ST Canadian Pacific Railway unveiled a $25bn bid for Kansas City Southern, a smaller American rival. The biggest-ever tie-up of freight railways would, if blessed by antitrust authorities, leave the merged firm with tracks linking Canada with Mexico, via the entire length of America’s contiguous states. It would also drive what Canadian Pacific’s boss, Keith Creel, enthusiastically dubs “an industrial renaissance”. “The prospects are compelling for growth across the industrial heartland,” Mr Creel says.
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Whether or not he is right about the future, the deal presents a huge bet that this renaissance is already under way in the present. For a change, investors seem to agree. Having lagged behind the S&P 500 index of large listed companies over the past five years, American industrial groups have outperformed the benchmark so far this year (see chart). After flowing mainly to firms that peddle mostly ethereal data, money is pouring into those that make things subject to the laws of gravity.
Leading indices of American purchasing managers, which survey private-sector firms regularly, are surging. On March 24th IHS Markit, a research firm, released one confirming that goods producers saw the fastest growth in new orders in over six years. S&P Global, a credit-rating agency, predicts that after an abysmal year in which revenues fell by 8-10%, America’s capital-goods sector will see sales rise by 5% in 2021. Worries about weak demand for products are being replaced in chief executives’ minds by fear of supply bottlenecks, from worldwide chip shortages to the freak traffic jam in the Suez Canal caused by a wayward container ship that may block a critical artery of global commerce for days.
Still, short-term supply niggles are a better problem to have than falling demand. S&P Global expects American light-vehicle sales to rebound from 14.5m in 2020 to 16.6m this year, notwithstanding the shortage of chips that cars increasingly rely on to keep running. CEOs across America’s industrial heartland are looking ebullient. Justin Rose of the Boston Consulting Group (BCG) sees evidence of “a real bounce-back” among such companies. They are “running factories as hard as they can”, he says, with order books sold out “well into next year”.
Chad Moutray, chief economist of the National Association of Manufacturers, reports that nearly 90% of members surveyed recently by the trade association were bullish about their businesses’ outlook for the next 12 months, the highest in two years. Two-thirds foresee revenues returning to pre-pandemic levels by the end of the year, as new orders, production and employment all pick up.
Chief executives are putting their money where their mouths are. On March 23rd Intel’s new boss, Pat Gelsinger, said the chipmaker would spend $20bn on two factories in Arizona. Scott Davis of Melius, a research firm, reckons that capital expenditure at several dozen leading American industrial companies he follows, including icons such as Caterpillar and Stanley Black & Decker, are set to rise by 20% on average this year. In February the index of capital spending maintained by Morgan Stanley, an investment bank, reached a high last seen in July 2019. Goldman Sachs, another bank, forecasts that such spending at S&P 500 firms will reach $740bn this year, above the $731bn in pre-pandemic 2019. In 2021 America’s leading firms will, Goldman Sachs predicts, spend more on capital goods, research and development than on dividends and share buy-backs.
Having sunk amid covid-19, America’s factory output was perhaps inevitably due for a sharp rebound. Vaccines are boosting consumer confidence and raising hopes that the economy may reopen fully soon. President Joe Biden’s $1.9trn stimulus package, coming on top of record levels of household savings, will leave Americans with more money to splurge on cars, electronics and other goods.
Positive structural forces are also at play. One is a likely change in industrial policy. As president, Donald Trump championed “Made in America” but waged trade wars that disrupted supply chains, raised costs for American manufacturers and estranged the foreign partners on whom they depend. The $3trn infrastructure splurge now being drawn up by his successor may be more helpful. Whether the proposal is wise, and how much of it will survive contact with Congress, is unclear. But Mark Zandi of Moody’s Analytics, a research firm, sees a “high probability” of a version passing this year. Whatever its final size, says Erik Lundh of the Conference Board, a research group, it will help industrial companies.
The more surprising factor that could power an industrial revival involves those tight supply chains. Companies facing delays to deliveries caused by bad weather in Texas, strained port capacity in California, stranded container ships in the Middle East or geopolitical tensions with China are thinking more seriously about building networks that can withstand such shocks. In the short term this involves stockpiling whatever components companies can get. In the longer run they are looking to bring production closer to home, which would bolster American suppliers.
This is already beginning to happen, says Mr Rose of BCG. General Motors is hoping to build, with LG Chem of South Korea, a second battery factory in America. Intel’s planned Arizona fabs are a way both to guarantee deliveries of chips to customers in Detroit and beyond, and to “near-shore” the semiconductor giant’s own production. Such efforts, too, could get a boost from Mr Biden, who has ordered a review of supply-chain vulnerabilities in chips, critical minerals used in electronics, large-capacity batteries for electric cars and vital medical equipment.
In short, many industry-watchers agree that the current policy and market environment represents the greatest convergence of pro-industry forces in decades. Some industrial concerns will fail to take advantage of it. GE, a troubled engineering titan, is shedding assets to stay afloat. The fate of Boeing is uncertain as its aeroplanes continue to face safety concerns and the pandemic clouds the future of air travel. Still, as Mr Davis puts it, “Whatever manufacturing companies survive this hell will be set to mint money.” ■
This article appeared in the Business section of the print edition under the headline “Firing on all cylinders”