U.S. manufacturers are often given up for dead, with most investors figuring they will end up destroyed by China, the new global centre for making things.
But the image of a prostrate American manufacturing sector being obliterated by Chinese competitors doesn't correspond to reality, says Benjamin Tal, deputy chief economist at CIBC World Markets. He believes manufacturers in the United States are undergoing a stealth renaissance that has gone unnoticed by most investors.
In a remarkable turnaround, the sector is prospering by winning orders from emerging markets, its supposed nemesis.
Consider one unexpected tidbit Mr. Tal uncovered in his statistical sleuthing: He found that one of the fastest growing U.S. export categories consists of selling toys to China - a market the Chinese are supposed to dominate. U.S. sales in this niche are surging, rising from only $14-million (U.S.) in 2008 to $240-million in the first nine months of this year, a staggering 17-fold increase.
Economically more important sectors, such as transportation and farm equipment, are also enjoying big rises in exports.
Investors should pay attention to the trend, because there is money to be made in following a contrarian viewpoint, Mr. Tal says. Manufacturing in the United States "is actually booming. It's expanding at a rate we haven't seen in many years," he said in an interview. "I think there are major opportunities in this space which the market has overlooked."
Mr. Tal contends that manufacturers south of the border are in the early stage of a long-term burst of prosperity that will also benefit Canadian companies that have U.S. operations or that provide supplies to the U.S. market.
Canadian companies that fit the bullish profile include auto parts makers Magna Int'l and Martinrea , as well as steel distributor Russel .
Unlike Canada, the United States is chockablock with well-known manufacturing companies that have a global presence, such as Gen. Electric ITT Deere & Co. and Caterpillar along with a host of lesser names. Investors haven't piled into these stocks yet, so shares are generally trading at reasonable valuations, often only 10 to 15 times projected earnings.
Mr. Tal's view on the rosy future for manufacturing is certainly not mainstream, but in a recent note to bank clients he outlined the foundations for his outlook.
His starting point was to look at previous periods when recessions ended. He discovered that housing and consumer sectors usually led upswings. But this time around, U.S. housing remains in the doldrums, and the consumer is "still in the bunker," according to Mr. Tal's note.
In contrast, manufacturing has been hot. And the growth seems to be coming in large part from export orders.
Merchandise exports from the United States have risen at an annual rate of more than 10 per cent during the first three quarters of this year.
Even more remarkable, sales to emerging markets like China have surged a staggering 45 per cent since the beginning of 2009, more than twice the pace observed in sales to developed countries. Sales to emerging markets have offset weakness in merchandise shipments to Europe, which slipped more than 3 per cent on an annual basis in the third quarter.
"Years from now, when the fog clears, it will become apparent that the big recession gave birth to a profound change in the structure of the U.S. manufacturing sector - a process that is currently in full swing," Mr. Tal wrote.
U.S. companies have been able to win export orders because they've cut costs, introduced innovative products and increased productivity at a faster clip than any other advanced country over the past decade, lagging only South Korea and Taiwan. "The manufacturing sector in the U.S. is now recapturing lost market share in emerging markets, even at the expense of Germany, still the leading exporter to these countries," Mr. Tal wrote.
Meanwhile, burgeoning middle classes in countries such as China are buying U.S. goods because they perceive them to be of higher quality than those made in their domestic market, a trend that may explain why the Chinese are snapping up toys stamped "Made in the U.S.A."
One of the easiest ways to play the U.S. manufacturing revival might be to focus on Canadian stocks that are benefiting from the trend.
CIBC analyst Michael Willemse, who follows manufacturers, says a representative portfolio of Canadian companies would include Bombardier , Magna, Martinrea, Linamar and Russel Metals. Another possible beneficiary might be ATS Automation which makes robotics equipment for assembly lines, he says.