U.S. Manufacturing Sector Remains Strong: 5 Top-Ranked Picks

On Apr 2, the Institute for Supply Management (ISM) reported its manufacturing index for the month of March. Despite a decline compared with the previous month, the manufacturing sector as a whole remains robust supported by a healthy domestic economy and strong global markets.

Also, the U.S. economy is currently in good shape. Notably, the demand for U.S. products remains robust globally. Moreover, worldwide demand for manufacturing products is on the rise. Taking these factors into consideration, manufacturing stocks with a favorable Zacks Rank are lucrative investment options at the moment.

March Reading Remains Robust

The ISM index for national factory activity was recorded at 59.3 in March compared with 60.8 in February. The reading also came in below the consensus estimate of 60.0. Notably, the February ISM manufacturing reading marked its highest level in 14 years.

However, a reading of more than 50 indicates that the sector is expanding. Although the reading for new orders, production and employment declined, all the metrics remained near recent highs. In fact, 17 out of the total 18 manufacturing industries reported growth in March. This clearly indicates that the U.S. heavy industrial sector is forging ahead with a strong momentum.

Moreover, the seasonally adjusted IHS Markit U.S. Manufacturing Purchasing Managers’ Index (“PMI”) recorded a reading of 55.6 in March compared with 55.3 in February. The average PMI reading for the first quarter of 2018 reflects the best quarterly performance since the third quarter of 2014.

Four Driving Factors

The U.S. manufacturing and heavy industrial sector is anticipated to sustain momentum for the rest of 2018. Let’s take a brief look at the four factors which will determine growth

First, Trump administration’s decision to cut tax rate from 35% to 21% has been a shot in the arm for the manufacturing sector. The U.S. government has also decided to allow U.S. companies to repatriate offshore profits at a one-time low tax rate.

Second, the government has taken a decision to spend a whopping $1.5 trillion on several infrastructure projects over a period of 10 years. This decision is likely to create about 25 million new jobs over a decade.

Third, the U.S. unemployment rate is around 4.1%, which is a 17-year low. Currently, the U.S. labor market is operating at near full employment level, which may result in wage increase spurring higher consumer spending. This in turn will fuel long-term economic growth.

Fourth, spending on capital goods surged in February supported by solid business confidence, improvement in international economic growth and a weakening dollar. A cheap dollar makes U.S. manufacturing sector competitive boosting the demand for indigenously produced goods.

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Our Top Picks

The manufacturing sector accounts for nearly 12% of the U.S. GDP. In fact, strong manufacturing goods orders are normally associated with stronger economic activity. At present, the U.S. economy is firmly placed on growth trajectory barring minor corrections.

Considering these positives, investing in manufacturing stocks with high growth potential will be a wise decision. We narrowed down our choice to five stocks each of which carries a Zacks Rank #1 (Strong Buy). You can see Zacks Investment Research