Increased capital spending, new orders and other indicators point to a vigorous rebound in America’s industrial sector. Chief executives are optimistic.

The past five years have been trying for America’s industrial sector, which has trailed the S&P 500. The shutdowns and production cuts of 2020 were bruising, particularly for manufacturing. Revenues in the capital goods sector fell by 8-10%, according to S&P Global. But now the tide is turning. Economic indicators including the Purchasing Managers’ Index (PMI) are surging. PMI data released in March by HIS Markit show that goods producers have seen a six-year high in new orders so far this year. S&P Global predicts a 5% sales increase in the capital goods sector in 2021.

Surging demand is stoking some concerns over supply, no doubt heightened by recent supply chain disruptions, due not only to the pandemic, but also to events such as the Suez Canal traffic jam and the ongoing chip shortage. Still, this is a better problem to have, and CEOs are optimistic. Justin Rose of the Boston Consulting Group (BCG) sees evidence of “a real bounce-back” among companies in the industrial heartland. They are “running factories as hard as they can”, he says, with order books sold out “well into next year”. A survey by the National Association of Manufacturers found 90% of its members are bullish about their 12-month outlook.

The general optimism is evident in capital spending, such as Intel’s plan to spend $20 billion on two factories in Arizona, announced on March 23 by the company’s new CEO, Pat Gelsinger. Scott Davis of research firm Melius believes capital expenditure at a number of leading American industrial companies will rise by 20% on average this year. In February Morgan Stanley’s index of capital spending reached a high not seen since July 2019. Goldman Sachs forecasts that such spending at S&P 500 firms will reach $740 billion this year, surpassing the $731 billion of 2019.

It could certainly be argued that a rebound in industrials following the lows of pandemic-wracked 2020 was inevitable. But it has been helped along by developments such as the vaccine rollout, and changes to industrial policy that are likely to create favorable conditions for growth in the industrial sector. The Trump administration’s trade wars “disrupted supply chains, raised costs for American manufacturers and estranged the foreign partners on whom they depend,” according to The Economist. There is reason to hope the rifts will be repaired. Further, analysts believe the infrastructure plan introduced by President Biden will benefit industrial companies.

The potential for more supply chain trouble remains, but American companies are being proactive. In addition to stockpiling components, many are thinking about building more resilient networks. This would likely entail more on-shoring, which Rose of BCG says is already starting to happen. General Motors is looking into building a second battery factory in America as part of its joint venture with South Korea-based LG Chem. Intel’s planned factories in Arizona would both ensure chip deliveries, and bring more of its own production to the U.S., benefitting domestic suppliers.

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