By Al Root
The 2024 U.S. Presidential election is days away. It's a close call and the outcome will impact trade and growth policies affecting manufacturing firms for years to come.
Manufacturers would prefer not to think about the election. They are, after all, having a good year, with the shares or manufacturers in the Russell 1000, not including Boeing, up about 22% year to date, in line with the S&P 500. They trade for about 25 times estimated 2025 earnings, a premium to the market's 21 times multiple. Improving demand for electrification equipment as big technology companies spend billions on AI data centers has helped, as has strong demand for airplanes and airplane parts.
Boeing remains a special case. Through Monday trading, shares were down about 41% year to date, battered by quality problems that have constrained production, increased regulatory oversight, and a strike by its machinist union.
Demand for AI and airplanes isn't likely to fall off in 2025, but a victory by Donald Trump could mean some massive headwinds for manufacturers. Trump, after all, wants to increase tariffs as a way to bring manufacturing back to the U.S. That sounds fine, but higher tariffs can lead to retaliation.
A trade war would be problematic for aerospace suppliers. China is a big Boeing customer, with China Southern Airlines operating about 200 737 model jets against about 280 Airbus A320 model jets. But Boeing could be in the crosshairs if new tariffs are imposed on China. One possible outcome: "China never buys another Boeing plane," posits Vertical Research Partners analyst Rob Stallard.
What's more, any tariffs levied on European manufacturers could result in retaliatory tariffs on Boeing. Airbus would be less affected by a trade war since it makes planes in Mobile, Alabama. Boeing doesn't make planes in Europe.
Aerospace suppliers, such as engine supplier GE Aerospace, serve both Airbus and Boeing. They should be OK. Still, they don't want any more headaches tied to uncertain production rates at Boeing.
It's not that tariffs and government policies can't boost manufacturing in the U.S. Employment in the sector has risen since Trump's first term as semiconductor companies, auto makers, and battery manufacturers have expanded domestic production.
From the end of 2016 until Covid-19 hit all industries, U.S. manufacturing employment rose from about 12.4 million workers to 12.8 million workers. Gains continued in the Biden Administration. Total manufacturing employment at the end of September came in at 12.9 million workers.
But restoring is only part of the business for manufacturers and not big enough to offset slower growth elsewhere. Shares of Rockwell Automation and Honeywell have only returned an average of about 8% over the past two years, trailing the S&P 500 by about 45 percentage points.
Reshoring trends weren't able to overcome general industrial weakness. The new orders subindex from the Institute for Supply Management monthly survey of manufacturing purchasing managers has been above 50 in just two of the past 24 months. (Readings above 50 signify growth.) The overall PMI index has been above 50 once in the past 24 months. The manufacturing malaise is real.
"Demand remains subdued, as companies showed an unwillingness to invest in capital and inventory due to federal monetary policy...and election uncertainty," said ISM PMI survey chairman Timothy Fiore in the Institute's October report.
There is good news though. In the short term, manufacturers will simply be happy to see the election, and the uncertainty that comes with it, pass, while enjoying the benefits of lower interest rates -- no matter who wins.
"Order momentum is expected to accelerate in late 2024 and into 2025 following the U.S. election and interest rate cuts given historically elevated capacity utilization rates across durable goods manufacturing," wrote Jefferies analyst Saree Boroditsky in a recent report.
That's a tailwind to industrial stocks in 2025 -- as long as the election doesn't mess things up.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 29, 2024 01:15 ET (05:15 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments