What US recession?
The industrial economy is on solid footing and activity is expected to pick up later this year, top CEOs in the space exclusively told Yahoo Finance at the Goldman Sachs Industrial and Materials conference this week.
“Super bullish,” Goldman Sachs analyst Joe Ritchie told Yahoo Finance when asked to sum up the vibe at the two-day event in New York City. “We are at the start of a very significant infrastructure build in the US Some might call it a US manufacturing renaissance.”
Several big catalysts are on the horizon for the industrials patch, people at the event told Yahoo Finance.
The first is unprecedented investment by the government in the form of the new Inflation Reduction Act (IRA). And the other is re-shoring initiatives — notably the Chips and Science Act — that are targeted to boost domestic output by strengthening the labor market.
These factors appear to already be driving a rebound in the fortunes of industrials in the second quarter.
“Demand from our larger customers is picking up,” Clean Harbors (CLH) co-CEO Michael Battles told us. Clean Harbors is a waste management firm that services the majority of the Fortune 500.
Added Battles: “They’re doing more production in North America… and we’re seeing that volume come into our network.”
The CEO of truck broker RXO (RXO) Drew Wilkerson sees a similar type of demand bounce unfolding.
“It's a tough macroeconomic environment right now. … But there are reasons for optimism in the back half of the year,” Wilkerson said.
Wilkerson added: “Retail and e-commerce customers are talking about how their inventory is restocked and we have to get orders out to the end consumers."
These green shoots come as the US economy is fresh off a meager 1.1% annualized Gross Domestic Product (GDP) growth in the first quarter. In 2022, GDP expanded by 2.1%.
If you take a look at the price action in the industrial complex, some investors have begun to position for the no-recession scenario. The emphasis being on some investors.
Year to date, Clean Harbors stock has soared 22% on the back of a string of solid quarterly results, while RXO is up a not-too-shabby 11%.
And after four consecutive weeks of outflows, the industrial sector recorded its first inflows in more than a month according to new data from Bank of America.
The closely watched Dow Transportation Average (^DJT) tells a little different story, however.
The transportation gauge — which is viewed by many as a leading indicator for the state of the US economy given the 20-stock index is comprised of airline, trucking, railroad, and delivery stocks — has underperformed the broader market over the past six months amid slowing economic growth and recession fears. It has tanked more than 5% compared to the Dow Jones Industrial Average's drop of nearly 2%.
Big-name industrials such as Caterpillar (CAT) and John Deere (DE) are each down by more than 10% in the past six months.
But if you're willing to brush those warning signs aside and bet on an under-the-radar industrial renaissance, there are opportunities.
Go with industrial powerhouses that play in smart infrastructure such as Johnson Controls (JCI), Goldman's Ritchie says.
He makes the case that supply chain pressures are easing, and it’s having a "really powerful impact on growth.”
Seana Smith is an anchor at Yahoo! Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
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