Zaibatsu’s Long Tail Can Drive the U.S. Economy


If the U.S. can avoid a recession, or at least a severe recession, perhaps we can thank industrial companies.

Demand on the consumer side of the economy is weakening, but remains strong in the manufacturing sector and, more importantly, looks sustainable even with further cuts in shoppers. Consider the prospects of some companies that are not paying.

Craig Arnold, CEO of Eaton Corporation, said more than 45 variations of “strong” and “strong” during a conference call with analysts on Aug. 2, including the is not included. “Sometimes it feels positive, sometimes it feels too positive,” says Arnold, whose company makes electrical equipment for buildings, power, automobiles, aerospace and more. With a market value of around $60 billion, Eaton is no small company.

Illinois Tool Works, which is larger than Eaton, said organic sales in July were up 18% year-over-year, marking the best monthly growth rate for the year. The company makes a full range of products for the food service, test and measurement, welding, construction and automotive industries, most of which “had a very strong start to the third quarter,” he said. is.

Companies as diverse as chemical manufacturer Dupont de Nemours, industrial distributor WW Grainger, and metal fabricators like Arconic say the same thing.

“The industrial part of the economy is definitely growing faster than the non-industrial part right now,” said DG McPherson, CEO of Grainger, which sells nearly every industrial-related part or gadget imaginable.

The strength of the industrial economy is nothing new, but its ability to weather a downturn in consumer spending is a change from past cycles.

Melius Research analyst Scott Davis said in an email: “There is too much demand for projects and megaprojects based on long-term change rather than cyclical change.”

There are various reasons for this decoupling. One obvious one is the rebound in investment in the oil and gas industry. After oil prices fell in mid-2014, some industrial companies reduced their energy exposure, especially in near-wellhead activities, but increased drilling has led to increased demand for steel, construction, trucks and safety equipment. As it grows, it has a widespread impact on the entire industrial economy.

Another problem is that car and heavy truck makers are still struggling to keep up with demand, have huge holes in their inventories, and rebuilds will take a while. Inventories in June stood at 95,000 units, down from a monthly average of 660,000 in 2019, according to the Bureau of Economic Analysis. The number of Class 8 trucks, known as big rigs, is about 10 in his first six months of the year, down from last year when his chip shortage was at its peak. , but he outperformed 6.6 in 2019, according to FTR Associates data. This is the exact opposite problem of large retailers grappling with excess inventory. Manufacturers of commercial jets and private he jets are also having a large backlog of orders as people restless from COVID-19 shutdowns are on the move again. Construction projects are moving forward, and even consumer-facing businesses continue with projects to improve logistics, an area where costs skyrocketed during the pandemic.

The transition to cleaner energy is also sparking industrial demand, and the climate change bill that passed the Senate over the weekend will keep those fires burning for some time, perhaps even through a consumer recession.

Eaton’s Arnold started the company to ride the wave of power demand as the economy moves away from oil. The company has a long history of selling transformers and circuit breakers for power generation and transmission, and most recently aims to become a major supplier to electric vehicle manufacturers. The company raised his earnings-per-share guidance for 2002 by four cents to his midpoint of $7.56, and raised its forecast for full-year organic sales to 13% from 11%. rice field.

“So despite all the talk about potential market slowdowns and recessions, we are ready if it happens. Recovery and some of our other end markets.” Arnold said by phone.

Eaton, DuPont and ITW, which raised their guidance in May, pointed to international weakness due to Europe’s difficulties with China’s lockdown and high energy prices. Still, there are no signs of international weakness spilling over to the United States. U.S. industrial production rose more than 4% year-on-year in June, a solid pace, on top of a strong rebound of over 9% last June. Inflation accelerated due to the lack of production, which would have curtailed overproduction of cars, homes, electronics and other commodities, causing a decline in output. For example, the trucking industry is notorious for its boom and bust cycles. This is because companies buy too many trucks when cargo demand is strong and have too much capacity when cargo demand cools. Those truckers couldn’t buy all the trucks they wanted. No big busts on this cycle.

Taken together, it makes sense that manufacturing could boost the economy through weak consumer spending.

More thoughts from other Bloomberg writers:

• It’s (still) harder to get a car: Anjani Trivedi

• Customer demand.No Supply Yet: Brooke Sutherland

• New Chip Law Could Be a $280 Billion Boondoggle: Editorial

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

Thomas Black is a Bloomberg Opinion columnist for Logistics and Manufacturing. Previously, he was responsible for industrial and transportation companies in the United States and industrial, economic and governmental affairs in Mexico.

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