5 Top Manufacturing Stocks To Buy Despite Soft Growth In June

The U.S. manufacturing sector maintained its growth in June albeit at a slow pace. Despite facing prolonged trade conflict with China, the largest trading partner of the country, and slowdown in global economy, the U.S. manufacturing sector managed to expand for 122 consecutive months.

Mixed ISM Manufacturing Data for June

On Jul 1, the Institute of Supply Management (ISM) reported that its index for U.S. manufacturing sector in June came in at 51.7. Although the reading fell below May’s reading of 52.1, it was better than the consensus estimate of 51.3. Notably, 12 out of the total 18 industries reported growth. Any reading above 50 indicates expansion of manufacturing activities.

On the positive side, the manufacturing employment index rose to 54.5 in June from 53.7 in May, indicating strong hiring by U.S. manufacturers. This reflects business confidence on the part of manufacturers despite lingering trade conflict with China, global economic slowdown and a rising U.S. dollar.

On the other hand, the new orders index declined to 50 from 52.7 in the prior month, raising questions on for future momentum. Moreover, the price paid by manufacturers dropped significantly to 47.9 in June from 53.2 in May, implying that inflation may remain muted in the near future.

U.S. Manufacturing Sector Still Best Globally

In a separate study, IHS Markit reported that U.S. manufacturing PMI rose 50.6 in June from 50.1 in May. This is a significant achievement given the fact that trade negotiations between the United States and China broke down abruptly in early May.

According to a report jointly developed by Caixin Media Co. and IHS-Markit, China’s manufacturing sector index fell to 49.4 in June from 50.2 in May. Furthermore, as per the National Bureau of Statistics of China, manufacturing PMI declined to 49.4 in June.

The IHS Markit Eurozone Manufacturing PMI came in at 47.6 in June 2019, slightly below the prior month’s estimate of 47.7. Within Eurozone, Germany continued to witness the biggest deterioration in manufacturing activities. Germany’s manufacturing PMI in June was just at 45. Moreover, the U.K.’s manufacturing PMI decreased to 48 from 49.4 in the prior month.

Therefore, it is clear that despite the slowdown in growth, the U.S. manufacturing sector is still the best globally. In addition, strong industrial production and core durable goods data of the United States in May also supports this view.

Likely Rate Cut by Fed to Boost U.S. Manufacturing

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On Jun 25, in comments at the Council of Foreign Relations, Fed chairman Jerome Powell reiterated his dovish monetary stance declared in June FOMC minutes. Powell said that the downside risks to the U.S. economy have increased. Consequently, a growing number of Fed policymakers are looking for a rate cut.

Despite several policy tools applied by the Fed, inflation remains muted in 2019. PCE inflation declined to 1.5% in May from 1.6% in April. Core PCE inflation –- the Fed’s favorite inflation gauge – rose 1.6%, well below the central bank’s target rate of 2%.

Personal spending increased 0.4% in May compared with the revised estimate of an increase of 0.6% in April. Moreover, the ISM manufacturing price index suffered a significant drop in June.

All these parameters indicate a possible rate cut by the Fed in July in order to sustain U.S. economic expansion. A drop in interest rate will reduce the cost of funds thereby boosting investments in the manufacturing sector.

Our Top Picks

Considering the above-mentioned factors, we narrowed down our search to five manufacturing stocks with a strong growth potential. Each of these stocks sports a Zacks Rank #1 (Strong Buy). You can see Zacks Investment Research