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The US manufacturing recession could be short-lived

After a lengthy period of destocking, US manufacturers are now seeing signs of an order recovery. One analyst argues this marks an imminent end to the capital goods recession
The US manufacturing recession could be short-lived

The US industrial recession affecting the world's equipment and machinery makers could prove surprisingly short-lived, paving the way for a potential return to global economic prosperity. That's the view of Liberum capital goods analyst Daniel Cunliffe, who notes that whenever the gap between production and new order levels is so wide, a recovery almost always follows.

North American industrial investment spend ground to a halt last year, owing to the sharp drop in oil prices suppressing the shale bonanza, as well as a strong dollar and global economic uncertainty in key regions such as China. Federal Reserve chairwoman Janet Yellen's call for interest rate caution has eased some of the headwinds. But what initially turned Mr Cunliffe so bullish was the alarming rate of destocking.

"The second half of 2015 saw the sharpest inventory cut in 30 years, excluding the financial crisis," he says. "Companies reacted to an order slowdown by cutting inventories and prices more than usual. That means production was cut, and industrial production drives economic growth.

"But now there are too many orders and not enough inventories. Both US distributor sales and US industrial production are showing early signs of recovery, while most companies are guiding for continued US weakness. Upgrading guidance even moderately will drive the shares, meaning short-term outperformance is around the corner."

 

Is this sustainable and what does it mean for the global economy?

US industrial production figures are closely watched, mainly because the sector's activity dictates the health of the world's biggest economy. Manufacturing across the pond also has big implications for the oil price, which in its currently depressed state continues to impact nations all over the globe. As North American factories are huge consumers of the black stuff, any surge in activity here is capable of significantly boosting demand.

Of course, a lot also hinges on the health of China, home to a fifth of the world's population. Fortunately business appears to picking up in the People's Republic, too, albeit at a much slower rate. Like North America, a period of vast destocking has given way to a higher level of orders to inventories as volatile property prices show signs of stabilising.

The Chinese government has similarly tried to rein in wage inflation, although Mr Cunliffe reckons the current scenario could spur a fresh investment wave. With employment costs soaring, he believes the West's cutting-edge robot technology is firmly on Premier Li Keqiang's shopping list.

"During the super-cycle everyone wanted a piece of the growth, which led to technology getting digested, in other words nicked, by China. Now companies are much more guarded with their technology. And the Chinese need it even more than during the super-cycle as they require productivity-enhancing technology that they don't have."