What #ConsumerSlowing Means to Industrials

Takeaway: Rising prices for consumer necessities may be negative for spending on other more discretionary categories.

What #ConsumerSlowing Means to Industrials - 4 15 2014 10 57 45 AM

Overview

The Hedgeye Macro team have presented their 2Q Macro themes and, as usual, it was data rich, timely, and insightful. The Macro Themes calls have too enviable forecasting track record to ignore. Below, we touch on how this quarter’s themes relate to parts of the Industrials sector. The themes of a slowing consumer, structural inflation, and a housing slowdown have implications for the sector and its performance relative to broader indices. We also highlight key transport data that shows broader resilience into 2Q 2014.

 

Commodity Price Divergence

Consumer oriented commodities, such as food/agricultural commodities, have increased much more than many industrial inputs, like copper or oil.  Large supply increases in several metal categories and weaker emerging market demand may be pressuring industrial metals. Rising prices for consumer necessities may be negative for spending on other more discretionary categories. 

 

What #ConsumerSlowing Means to Industrials - eee1

 

Capacity Utilization

While some slack remains, corporations have tended to repurchase shares and pay dividends rather than invest in capacity in recent years. Long-term, that may conceptually result in too little of the right capacity in the appropriate places.  One person’s inflation may prove to be another person’s pricing power, potentially benefiting well-positioned manufacturers.  North American heavy truck fleets appear to be a compelling example of this theme, discussed below.

 

What #ConsumerSlowing Means to Industrials - eee2

 

Housing Slowdown

A variety of factors, from new mortgage rules (QM) to higher interest rates, appear to be pressuring housing activity.

 

What #ConsumerSlowing Means to Industrials - eee3

 

Residential Construction

While still posting strong year-on-year growth, there appears to be a deceleration in new residential construction spending.  Weather is a likely contributor, but the broader trends are also potential drivers.

 

What #ConsumerSlowing Means to Industrials - eee4

 

Truckload Rates

Truckload rates have been rising as fleet utilization is at decade-plus highs.  Truckers have been hesitant to invest in capacity growth in recent years. It is a potential positive for PCAR and other Truck OEMs, while likely negative for truckload 3PLs that are structurally short capacity. 

 

Heavy Truck Backlog to Build (North America)

The environment for Heavy Truck OEMs appears better, in part due to higher equipment rates.  However, we would generally see a high reading on this index as an exit signal should it continue to improve.

 

China Exports

Recent increases in the CRB index are particularly noteworthy given signs of weaker Chinese activity.  China is often viewed as the key swing consumer of commodities.

 

Cass Freight Index

The 1.144 March read of the Cass shipment index is at the high-end of its range in recent years.  

 

IATA FTK Growth

International air cargo growth continues to improve, a positive sign for carriers. 

 

Intermodal Rail Traffic

Intermodal traffic has rebounded smartly, partly reflecting better weather through March.

 

*   *   *   *   *   *   *

 

Editor's Note: This is an excerpt of a research note that was originally provided to Industrials Pro subscribers on April 11, 2014 by Hedgeye’s Industrials Sector Head Jay Van Sciver. Follow Jay on Twitter @HedgeyeIndstrls.

SUBSCRIBE TO HEDGEYE.


SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more