Capacity Utilization is Still Going Strong for U.S. Industry
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Capacity utilization is a very important metric used to judge the strength of American industry. With rising transportation costs and the push to bring the consumer and producer closer together companies are starting to bring factories back to America. The risk of the trade wars and escalating import tariffs between different nations gives extra incentive for large manufactures to place factories on both sides of the Pacific. The recent scuffle in the solar industry between the United States and China shows that trade relations can easily deteriorate. There are many negatives throughout the world economy but investors should not ignore the positives. U.S. unemployment is still at elevated levels and the European debt crisis has not been fully resolved. Still, the U.S. industry is chugging along and the the monthly data below shows that industrial production is almost at pre-2008 levels.
Capacity utilization for manufacturing firms is stronger than that of the overall industry. The 2008 recession prompted companies to shut down and limit production. Although the utilization numbers are not as near the 85% or 82% range set during the higher points of the 70s and 80s the current figures are far above recession levels. The wars in the Middle East and continued demand for the exportation of military vessels in contested areas like southern Asia have significantly helped arms manufactures like Lockheed Martin and Raytheon.
While the numbers for all industrial firms are still a couple percentage points below the numbers set in the 2000s, manufacturing has completely snapped back. These larger manufacturing firms have private and public customers which helps to decrease their direct dependency on the U.S. consumer. As the the U.S. economy continues to orient itself away from the overweighted FIRE (Finance Insurance and Real Estate) sectors, manufactures and industrial firms offer dependable jobs and portfolio diversification. As the charts show even in the midst of Europe's troubles manufacturing staged a serious come back from the 2008 recession.
There are a number of different ways to invest in U.S. industry. Spyder offers the Industrial SPDR (NYSEMKT: XLI) which as of July 30, 2012 is 97.64 percent invested in the industrial sector and 1.60 percent invested in the technology sector. The expense ratio is very low at .19% per year and the latest turnover figures show that around 4% of the portfolio is turned over every year.
Vanguard has the Vanguard Industrials ETF (NYSEMKT: VIS) which as the same expense ratio and a slightly higher turnover ratio at 5%. As of July 2012 Industrials make up only 94.72 percent of holdings, technology is around 2.67 percent, while basic materials and consumer cyclical make up around 1 percent.
The iShares Dow Jones US Industrial (NYSEMKT: IYJ) is the most diversified with only 83.37% of holdings in industrials, 9.11% in technology, 3.68% in basic materials, and 2.99% in consumer cylicial. Out of all of the above ETFs this one has the highest expense ratio at .47% and an annual turnover rate of 6%.
These large ETFs are not perfect as they invest in large conglomerates which derive a large portion of their revenues and profits from non-industrial industries. General Electric Company (NYSE: GE) is currently 12.1% of XLI, 13.5% of VIS, and 12.4% of IYJ. GE's financial division, GE Capital makes a significant part of the company's profit at 32% of 2011's operating profit. GE Capital is a major part of the company and according to the 2011 annual report the company expects it to make up about 36% of revenue at the end of the decade.
American Industry and manufacturing is currently a strong part of the economy. Capacity utilization is not at the highs set in the 70s or 80s but it is far above recession levels. Though recent ISM surveys are not very bullish this is a sector which deserves to be watched. With higher transportation costs over the coming decades, firms have great incentives to bring factories back to their Western markets. By choosing which ETFs to invest in investors can choose the degree of exposure to the industrial sector while playing the revival of American manufacturing. With the down turn in China it appears best to hold off in investing in the sector for the time being. Still, now is the time to start investigating so that when strength returns to the World economy then you will know how to take advantage of the long term trends.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.