Baird analysts predict slow but steady uptick in manufacturing, transportation and industrial areas

Manufacturing and transportation companies have seen falling order levels flatten out over the last six months and some sectors can expect a limited recovery in 2010, according to several analysts with Milwaukee-based Robert W. Baird & Co. that cover those sectors.

“(Housing) is one of the few markets where people are comfortable saying that it will grow and it will grow meaningfully (in 2010),” said Peter Lisnic, a Baird senior research analyst that covers industrial and building products. “The broad consensus for housing starts for next year talks about numbers in the high 700,000 to 800,000 units ranges. Our own models suggest numbers that will be lower but will be above numbers that we’re seeing this year at the 550,000 to 600,000 range.”

Home renovation and commercial building will remain at current lows for much of next year, Lisnic said.

“(Nonresidential) construction starts are down about 18 percent this year,” he said. “And forecasts are for at least the same if not worse for next year.”

Transportation-related businesses and manufacturers have seen a limited recovery this year and should see continued improvement in 2010, said Jon Langenfeld, a Baird analyst who covers transportation and logistics.

“The encouraging part is looking at what has happened with demand trends, nationally and internationally,” he said. “Demand trends have bottomed – that is still a very weak trend, but it is stability. That’s unusual because there has been so much volatility (in recent years) and is encouraging from our standpoint.”

Transportation-related companies should see an additional boost during the second quarter of 2010, when manufacturing, retail and related companies replenish their inventories, which were allowed to fall to “unprecedented” levels this year.

“When the confidence builds out there from the retailers, from the manufacturers, that inventory will start to expand,” Langenfeld said. “We think that is probably not going to occur in any large way until the second quarter. But we think it will eventually occur as the economy mends itself.”

Recovery in the automotive market remains several years off, largely because of low levels of consumer confidence and available credit for potential buyers, according to David Leiker, a Baird analyst that covers the auto and commercial truck industries. However, the domestic auto industry will eventually need to supply the country with about 15 million new cars per year.

“The scrap rates are 12 million to 13 million units a year in the U.S.,” Leiker said. “And household growth puts us at another million or two million units there. But that’s probably not until somewhere between 2013 and 2015, unless there is a fairly rapid recovery in employment and incomes on the consumer side.”

Manufacturers that are part of the automotive supply chain continue to struggle with low sales levels and a difficult borrowing environment. Many of those suppliers will continue to struggle in 2010, Leiker said.

“Among the private companies, which make up a large part of that supply chain for the auto industry, they continue to be under stress as volumes have picked up to replenish inventory,” he said. “The working capital constraints have been pretty heavy. There are still a couple of suppliers that are filing for bankruptcy.”

While signs are pointing to a slow recovery in the manufacturing sector, that recovery remains vulnerable, Lisnic said.

“Demand has generally bottomed across end markets, but there is pretty significant uncertainty as to how fast the recovery slope will be or how steep the slope will be,” he said. “Managements are uncertain at this point as to the strength of the recovery. That’s tempering capital investment, that’s tempering hiring plans and constraining the growth.”


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