Manufacturing Churns Out Slow Growth In U.S. - ETFs In Focus

Includes: FXR, IYJ, PKB, PRN, XLI
by: Zacks Funds

U.S. manufacturing is yet to recover from prolonged sluggishness. This was indicated by the recent manufacturing report from the Institute for Supply Management (ISM). As per ISM, the reading was 50.8 in April (a reading of 50 or higher points to growth), down from 51.8 recorded in March. Economists had forecast the index to decline to 51.4% (read: ETFs to Watch on U.S. Manufacturing Revival).

Though the latest reading has come in above 50 for the second successive month and was the second best number in the last eight months, the sequential decline may subdue investors' optimism over the sector. New orders index to 55.8% from 58.3% in March.

Huge capex cuts by energy companies to fight back the plunge in oil prices and still-sluggish export demand in the wake of global growth issues kept a check on the sector. However, investors should note that export orders touched a 17-month high.

A comparable industry measure compiled by Markit also point to the same trend. Markit's final U.S. manufacturing PMI fell to 50.8% in April from 51.5% in March. As per trading economics, input costs bucked the trend at the manufacturing sector as pressures building up lately defying the prolonged trend of decline. This was because raw materials' costs crept up leading to higher input costs. However, output prices fell resulting in reducing pricing power.

Market Impact

Most of the industrial ETFs were in the green post release of the manufacturing data. ETFS like the PowerShares DWA Industrials Momentum Portfolio ETF (NASDAQ:PRN), the iShares U.S. Industrials ETF (BATS:IYJ) and the Industrial Select Sector SPDR ETF (NYSEARCA:XLI) added small gains on May 2, 2016 (see all industrials ETFs here).

Bottom Line

While the latest data was nowhere near impressive, it can be seen as a slowly improving trend. ISM Employment Index was 49.2% in April versus 48.1% registered in March, revealing that the decline in employment - this time for the fifth successive month -- is finally slowing. ISM noted that out of the 18 manufacturing sectors under coverage, 11 logged growth in employment in April.

On the other hand, the long-tottering energy sector might be on an upward trajectory in the days to come on an oil price recovery. This can spell optimism for the manufacturing sector as a whole.

Moreover, the U.S. labor market remains healthy. This should also back consumers' purchasing power, boost demand for goods and result in higher factory activity. A still-low interest rate environment in the U.S. should also favor the industry as the sector depends on interest rates for its operations.

The scenario beyond the U.S. border should also gain steam on a huge round of monetary easing. In conclusion, we would like to note that a full-fledged recovery may take more time than previously envisaged. So, as of now, it is better to bet on our top-rated industrial ETFs PowerShares Dynamic Building & Construction ETF (NYSE:PKB) - a key beneficiary of the solid construction spending in the U.S. - and the First Trust Industrials AlphaDEX ETF (NYSEARCA:FXR). On May 2, 2016, PKB and FXR were up 1.52% and 0.44%, respectively. Both carry a Zacks ETF Rank #2 (Buy).

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