US Manufacturing will Save the Economy.? S&P Answer

Growth In The U.S. Manufacturing Sector Won't Lead The U.S. Economy Out Of The Doldrums

Although the U.S. economic recovery has been weak, it's been enough to stoke demand for manufacturers. Operating results among these issuers have rebounded sharply since the economy hit a trough in 2009. As a result, manufacturers have been able to improve credit measures, build up cash balances, and issue debt in the credit markets when they need to refinance. As a result, Standard & Poor's Ratings Services has upgraded many U.S. capital goods, automotive, and auto supplier companies since 2009 and maintains mostly stable outlooks on them.

Still, we don't believe this progress in the manufacturing sector portends much improvement in the domestic economic recovery. Manufacturing represents a much smaller share of economic activity and jobs than it did in decades past. Since mid-2009, it has accounted for about 9% of total U.S. nonfarm payrolls, down from more than 16% in 1990. Domestic hiring in the manufacturing sector has been modest, and we don't expect it to pick up significantly in the next year or two, particularly given the increasingly mixed economic indicators of the past several months.

Overview

• The U.S. manufacturing sector has rebounded since the 2008 to 2009 recession, but any growth is unlikely to propel a broader domestic economic recovery.
• Companies have gotten most or all of the benefits from previous cost-cutting efforts, and manufacturing jobs lost during the recession aren't likely to return any time soon.
• Our base case economic forecast projects slow but still-positive growth; however, another downturn is increasingly possible and would hurt credit quality in the sector.

We believe sales growth will slow for most U.S. manufacturers while the economic recovery remains weak. Profitability is solid for most companies, often at prerecession or even record levels. However, maintaining this rate of sales growth will become increasingly difficult as companies face year-over-year comparisons with the more normalized activity levels of late 2010 through 2011. In addition to improved demand, manufacturers have benefited from the heavy restructuring they carried out in 2008 and 2009--primarily layoffs--that lowered costs. Further improvements in profitability may be difficult to generate due to higher commodity costs (e.g., those for steel and rubber). Greater price competition if markets slow significantly would also hurt profitability.

Manufacturing Will Follow The U.S. Economy, Not The Other Way Around

In our view, U.S. manufacturers remain more likely to benefit from an economic recovery than fuel one. We see the health of U.S. manufacturing companies reflecting the state of the broader economy, although certain sector-specific conditions also come into play. Economic risks have increased lately. In the U.S., unemployment remains high–-and we don't see manufacturers doing much to change that–-while GDP growth remains sluggish. We believe companies are being cautious about hiring because the outlook for demand is very uncertain. However, good profitability and a base economic forecast that still anticipates slow growth are supporting the sector's credit quality for now.

Standard and Poor's