April 19, 2006

Manufacturing should remain strong

By Ben Klayman

CHICAGO (Reuters) - U.S. manufacturing may not have the sex
appeal of the latest iPod digital music player, but demand is
strong and industry executives see that trend holding in the
second quarter.

Manufacturing plants are running at levels unseen in five
years and companies -- including United Technologies Corp.,
Eaton Corp. and Parker Hannifin Corp. -- are issuing sunnier
profit forecasts on higher demand.

"The heavy manufacturing side of the U.S. economy -- which
is pretty much under the radar because it's dwarfed by the
consumer side -- is doing really well and will continue to do
well for a while," said Peter Sorrentino, chief investment
officer with Bartlett & Co. in Cincinnati.

"The broader themes of a manufacturing-led recovery are
still intact," added Sorrentino, whose firm owns shares in such
manufacturers as General Electric Co., 3M Co., Dover Corp. and
Illinois Tool Works Inc.

Last week, the Federal Reserve said U.S. plant capacity use
-- a measure of how close to full potential factories, mines
and utilities are running -- reached its highest point since
September 2000.

"Manufacturing is growing at a fairly good clip. It
exceeded the growth of the general economy by a substantial
amount in the fourth quarter and will probably equal the growth
of the general economy in the first quarter," said Daniel
Meckstroth, chief economist for the ManufacturersAlliance/MAPI.


That optimism is echoed in the companies' improved profit

On Wednesday, diversified manufacturer United Technologies
posted a better-than-expected increase in quarterly earnings
and raised its profit outlook for the year, citing sales growth
and strong order backlogs.

"This is a great start to 2006 and supports increasing our
full-year earnings outlook," said George David, chief executive
of the Hartford, Connecticut-based company, whose operations
range from jet engine maker Pratt & Whitney to elevator maker

On Tuesday, Parker, whose motion and fluid control
technology is used in construction, energy, computer chip and
aerospace industries, raised its profit outlook, citing strong
demand from aerospace and North American customers.

On Monday, Eaton posted better-than-expected quarterly
earnings and boosted its full-year forecast, pointing to strong
demand in its electrical, hydraulic and truck businesses.

"The economy is quite strong," Chief Executive Alexander
Cutler told Reuters in a telephone interview. "If anything,
maybe in this first quarter, it's getting a little hot."

Eaton previously believed first-quarter U.S. Gross Domestic
Product, the measure of total goods and services produced
within U.S. borders, would increase 4.5 percent, but now
believes it will top 5 percent.


But those manufacturers who fail to please investors will
pay the price. Despite strong earnings, GE and Honeywell
International Inc. saw their shares slip on the days they
reported results after they failed to boost forecasts.

"Current multiples leave no room for slip-ups and any signs
of weakness, be they perceived or realized, will be punished,"
Deutsche Bank analyst Nigel Coe said in a research note before
many of the companies had reported.

Other manufacturers that have hiked their profit forecasts
over the past two months include 3M, ITW, Danaher Corp.,
Amphenol Corp. and Timken Co.

Shares of United Technologies, Illinois Tool, Eaton and
Amphenol hit all-time highs recently after raised forecasts and
3M shares showed their biggest one-day gain in almost four

All this strength leaves some investors and executives
worrying that the Fed will raise short-term interest rates
several more times to avoid inflation. Other challenges the
sector faces include higher raw materials and energy costs.

"Overall, it's going to be a moderate growth year, starting
out with a bang and then weakening toward the end of the year,"
said Meckstroth, who expects U.S. economic growth will slip to
4 percent in the second quarter and then slow to 2 percent in
the second half of the year.

However, Eaton's Cutler said that while rate tightening
would slow the second half growth, it would help make the
expansion last longer.

Executives and investors also are cheered that the
expansion is not focused on the developed industrial nations.

"A lot of investors get this real myopic view that the
world is the G-7 (countries) and this time out it's really
not," Bartlett's Sorrentino said. "It's everybody but the G-7."