There’s a popular expression often heard in Wall Street circles: “Throwing the baby out with the bathwater.”
It’s an effective (overly graphic?) way of saying that, when you throw out the bad stuff, you don’t have to include the good stuff, too.
Well, the baby has been on a wild ride of late. The stock-market pullback that rattled investors around the world last week – and has continued into this week – was the most recent reminder of just how intertwined global economies have become.
Alas, the world’s industrial economy shouldn’t be knocked around too much by the gyrations of the financial markets, according to Nicholas Heymann, an analyst at Prudential Securities, who says the slowdown the industrial sector is now experiencing is a result of a supply adjustment, not diminishing demand.
“We believe the current unsettled market conditions surrounding the recent global selloff in equities is not likely to negatively impact the long-term surging demand for global industrial infrastructure, particularly in developing economies,” Heymann said.
No doubt, the North American industrial sector had a difficult back half of 2006; a slowdown in capital spending and production in the third quarter was followed by an outright contraction in the fourth, which had a disproportionate impact on North American industrial manufacturers. The slowdown was led by sharp cooling in the residential housing and automotive markets, leading some to call for a recession within manufacturing and the industrial segment of the U.S. economy.
Heymann is not part of that camp, and he’s looking for a steady reacceleration across the industrial sector of the U.S. economy for the rest of this year.
“We expect industrial production is likely to follow the early signs evident in February’s rebound in industrial manufacturing activity and climb 2-3 percent in the first half of 2007 before rising 4-5 percent in the second half,” Heymann said.
The pickup in the second half, the analyst says, reflect a sharp reduction in the drag on industrial production from home and auto sales.
“While these are not expected to rebound meaningfully in the second half, their negative impact should largely disappear as a drag on year-over-year comparisons,” he said.
In addition to noting the rebound in the Institute for Supply Management’s PMI reading, Heymann said demand for industrial products is still strong because of solid export growth. The soft U.S. dollar also makes U.S. industrial products compellingly priced to foreign buyers, and interest rates remain low by historical standards.
Indeed, last week’s report from the ISM showed new orders on the rebound, along with healthier readings on several other important fronts.
“February proved to be a good month in the manufacturing sector as new orders, production and employment contributed to a solid growth scenario,” said Norbert Ore, chair of the ISM Manufacturing Business Survey Committee. “The inventories index showed significant reduction in manufacturers’ inventories for the second consecutive month, and the backlog of orders index is growing once again.”