Inflation Pressures Impact Manufacturing Sector, But Steady Growth Seen

The manufacturing sector has been heavily affected by inflation pressures, but it continues to fight against the odds. In August, production experienced steady growth for the second consecutive month, indicating a potential turnaround for the industry. As anticipation builds for the Federal Reserve’s September FOMC meeting and hopes rise that the tightening campaign may come to an end, industrial stocks like Hubbell Incorporated, Applied Industrial Technologies, Eaton Corporation plc, Graham Corporation, and Flowserve Corporation are likely to benefit in the near future.

In August, U.S. factories saw a 0.4% increase in production, following a 1% increase in July. Manufacturing output rose by 0.1% during the same period. However, the growth was somewhat hindered by a 5% decline in output for motor vehicles and parts. Nonetheless, factory output increased by 0.6%. Capacity utilization reached 79.7% in August, aligning with the long-run average from 1972 to 2022.

The manufacturing sector continues to face challenges and contracted for the 10th consecutive month in August. The Institute for Supply Management’s purchasing managers index for manufacturing experienced a slight increase to 47.6 in August. Any reading below 50 indicates a contraction in the sector.

Rising raw material costs and increased borrowing expenses have hindered production at U.S. factories. In response, the Federal Reserve has raised its benchmark interest rate by 525 basis points since March 2022, bringing it to a range of 5.25% to 5.5%. However, inflation has declined significantly from its peak of 9.1% in June 2022, with the consumer price index rising by 0.6% in August and the producer price index rising by 0.7%.

Considering the cooling job market and the decline in inflation, investors are optimistic that the Federal Reserve may soon end its current monetary tightening policy and potentially leave interest rates unchanged in its September meeting. Lower interest rates would be favorable for the manufacturing sector, as they would help boost production at U.S. factories.

In light of this situation, we recommend considering investments in Hubbell Incorporated, Applied Industrial Technologies, Eaton Corporation, Graham Corporation, and Flowserve Corporation. These stocks have a favorable Zacks Rank of #1 (Strong Buy) or 2 (Buy) and offer the potential for good returns.