Costs Are Crashing the Party for Manufacturers
July 22 2018 - 6:29AM
Dow Jones News
By Bob Tita and Doug Cameron
Manufacturers are booking more orders and delivering higher
profits in a strong U.S. economy.
But investors are worried that the good times won't last: Costs
are rising at some of the biggest industrial companies due to
tariffs and a super-tight labor market.
Upcoming earnings will indicate how much of a dent those
pressures are making on the bottom line. This week, 3M Co.,
Harley-Davidson Inc. and Whirlpool Corp. are scheduled to
report.
Industrial stocks are down around 2% this year versus a 4.8%
rise in the S&P 500. Some of the biggest manufacturers are
leading the decline. Shares in Caterpillar Inc. have dropped 13%
this year, while 3M is down 14%.
Shares in small- and medium-size companies have fared better
than those of manufacturing heavyweights, but that has done little
to reassure money managers. Assets in industrial exchange-traded
funds have declined 8% in the last month alone as investors moved
money into consumer staples and utilities.
"We're tracking towards the worst relative year for industrials
in 20 years," said Scott Davis, chief executive at Melius Research
LLC.
Shares have recovered slightly over the past week as initial
earnings reports beat analysts' expectations. Fastenal Co. and W.W.
Grainger Inc., which supply factories with everything from bolts to
cleaning supplies, both signaled strong demand. Honeywell
International Inc. on Friday reported higher sales and profit
margins at all four of its divisions and said the trend is
continuing in the third quarter.
But that good news has done little to offset investors'
preoccupation with the effects of the Trump administration's import
tariffs on manufacturers. Shares in aluminum producer Alcoa Corp.
have fallen nearly 16% since Wednesday, when the Pittsburgh-based
company said the 10% tariff on aluminum was driving up costs of the
metal it imports to the U.S. from its smelters in Canada.
Investors' dissatisfaction stands in contrast to bulging order
books and rising industrial output, buoyed by a rebound in oil
prices that has spurred more domestic drilling. U.S. aerospace and
auto manufacturers have also reported strong orders.
But near-record-low unemployment of about 4% is driving up wage
bills and leaving some companies short of workers, holding back
production. The labor market is particularly tight for experienced
workers in cities such as Charlotte, N.C., and Houston, where steel
mills are expanding production of pipe and tubing used in oil and
natural-gas wells. Tariffs on imported pipe are helping to boost
drilling companies' demand for those products made in the U.S.
"To make those products, they have to hire more people," said
Kirk Murray, vice president of SeAH Steel America Inc. "From
experience, I can say it's not easy." SeAH is expanding a tubing
mill in Houston that had been dormant before the South Korean
steelmaker bought it in 2016.
Other companies are scrounging for everything from low-skilled
line workers to software engineers that can operate robots. The
worker shortage threatens an upturn that is in its sixth month,
measured by industrial output. Previous cycles have typically
lasted about four years.
Manufacturing unemployment is at its lowest level in 15 years,
according to the Labor Department. Companies surveyed for the
closely watched Chicago Business Barometer said production fell in
June from a year earlier, the fourth monthly drop since December.
More than a third of companies said they had boosted salaries.
The heavy-truck market highlights the gap between strong growth
signals and investor anxiety. North American orders are at a nearly
20-year high, but production hasn't kept pace, in part because of
labor shortages, supply-chain disruptions and some concern that
orders could be canceled.
Shares in Paccar Inc., the maker of Kenworth and Peterbilt
trucks, are down nearly 12% this year.
Orders for heavy-duty trucks have surged since last fall to an
annualized rate of about 430,000 vehicles. But manufacturers have
been building trucks at a much slower rate. After particularly low
production volume this spring, market forecaster ACT Research
reduced its projection for this year to 316,000 vehicles from
328,000.
ACT President Kenny Vieth estimates that some 10,000 trucks were
sidelined at assembly plants in April waiting for windshields, wire
harnesses and other components. He said suppliers have been
constrained by low inventories of parts from overseas and
difficulty hiring workers.
Beyond the truck industry, demand signals and leading indicators
such as new orders remain positive. That is calming concerns that
the first months of 2018 may have been a high-water mark for
construction and mining machinery, a possibility mooted by
Caterpillar executives in April.
Caterpillar later said it had been misinterpreted, and expects
the momentum to continue. The equipment maker reports
second-quarter results on July 31.
Write to Bob Tita at robert.tita@wsj.com and Doug Cameron at
doug.cameron@wsj.com
(END) Dow Jones Newswires
July 22, 2018 07:14 ET (11:14 GMT)
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