Industrial spending should be booming. But will he?

Could this economic downturn be different for industrial companies? There are valid reasons to think so, but it’s getting harder and harder to make the case.

The unraveling of the pandemic surge in consumer demand for physical goods has accelerated in recent weeks, with retailers at Target Corp. to Walmart Inc. and Dick’s Sporting Goods Inc. issuing a cautious note on inventory and future sales. This is to some extent unavoidable and reflects a normalization of buying habits rather than a collapse in consumer demand, but a slowdown is underway and could accelerate as inflation eats away at purchasing power . However, in part because of these Covid behavioral distortions, some investors and analysts have speculated that industrial capital spending may prove more resilient to a slowdown in consumption than history suggests.

On the one hand, industrial companies have yet to see the benefits of the US$550 billion infrastructure bill. Structural changes such as the shortening of global supply chains and the need to invest in more environmentally friendly factories offer another leg of potential growth outside of normal cyclical economic factors. The recovery in automation overhauls is unlikely to reverse, even if the labor shortage eases. In addition, there is the simple fact that the only way to sustainably combat housing and oil price inflation is to invest in more national energy infrastructure and residential construction. Supply chain bottlenecks have prevented many industrial companies from following through on their plans to increase spending, meaning there hasn’t been much of a spike in post-Covid capital investment yet. Globally, the number of new manufacturing projects was about 40% below pre-pandemic levels in 2021, notes Scott Davis of Melius Research, citing data from the United Nations Conference on Trade and Development.

By most measures, there should be a boom in industrial spending. It is probably economically irresponsible not to have one. That doesn’t mean it will happen.

Consider the housing market. Mortgage rates climbed to 6% this week, which has the effect of excluding a significant number of potential buyers from the market. Even before the latest rate hike, there were signs of a slowdown: New home construction in the United States fell in May to an annualized rate of 1.55 million, the lowest in more than a year, according to this week’s data from the Census Bureau and the Department of Housing and Urban Development. Building permit applications, a proxy for future construction, fell to 1.7 million annualized units, the lowest since September. This dataset is subject to significant revisions, and supply chain challenges complicate translation to actual on-hand inventory; builders are still sitting on large backlogs of unfinished homes. But U.S. homebuilders are seeing yellow lights: The National Association of Home Builders/Wells Fargo’s industry confidence gauge slipped in June to the lowest level in two years, according to data released this week. week.

This is a problem because even at the higher construction rates of the previous months, the imbalance between supply and demand in the housing market was on track to persist for about a decade by some estimates. The ideal scenario is a sufficient cooling in consumer demand to ease inflationary pressures, but not a sufficient cooling for builders to decide to significantly reduce construction. It’s an incredibly difficult needle to thread. Given the choice between controlling inflation in the short term and solving the housing shortage in the longer term, the Federal Reserve seems inclined to prioritize the former. “We are well aware that mortgage rates have risen a lot and that you are seeing an evolution in the housing market,” Federal Reserve Chairman Jerome Powell said this week at a press conference after the bank. Central Bank raised benchmark interest rates by 75 basis points. “We are watching him to see what will happen. How much will this really affect residential investment? Not really sure. How will this affect housing prices? Not really sure, that’s – I mean, obviously, we’re watching this very closely.

There are more encouraging signs in the energy market. Oil and gas company rental revenue jumped 43% in the quarter ended April 30 at Ashtead Group Plc, the UK-based equipment rental company said in an earnings update this week. The number of oil and gas rigs is up about 60% year over year, according to data from Baker Hughes. Major oil companies are increasing capital spending this year, and the Biden administration in recent weeks has sought to put even more pressure on domestic suppliers to increase capacity amid soaring gasoline prices. . But Barclays Plc analyst Julian Mitchell points out that industrial production was volatile during the 1970s despite a period of oil price shock, suggesting that may not be enough to support market fundamentals. sector. It should also be noted that many multi-industry companies exited or significantly reduced their energy exposure through spinoffs and divestments following the price-driven manufacturing recession of 2015 and 2016. petrol.

A significant portion of post-pandemic announcements for new US factories come from the semiconductor industry. The chip crunch that has plagued everything from cars to e-cigarettes shows that the world clearly needs more semiconductor manufacturing capacity. And yet demand for consumer electronics, including televisions, computers and smartphones, appears to be weakening. Nikkei reported this week that Samsung Electronics Co. is temporarily halting new supply orders and asking some suppliers to postpone or cut shipments due to concerns about inflation and rising inventory. Is there sufficient demand from other industries to help semiconductor manufacturers consider long-term capacity expansion? Theoretically yes, but time will tell. “We’re definitely going through some rough times in the near term, as everyone else will too,” Intel Corp. chief financial officer David Zinsner told a Bank of America conference earlier this month. Corp. “And what we have to do is kind of keep our heads down and run the business, execute the plan and things will have a good outcome for us.”

Anyone hoping for a clear reading of industrial demand from the upcoming second-quarter earnings season is going to be disappointed. The Covid lockdowns in China have most likely compounded the noise in the numbers from stubborn supply chain challenges. The best indicator of underlying demand and how resilient the manufacturing sector is to recessionary concerns will be what companies say about their spending plans. Kennametal Inc., Emerson Electric Co. and Rockwell Automation Inc. cut their 2022 capital spending targets slightly last quarter, citing a mix of labor shortages, supply bottlenecks and higher costs. students. If the list of companies making cuts grows longer, maybe this time isn’t so different after all for the industrial world – unfortunately, for everyone else.

Bloomberg

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