America's grand 20th-century experiment -- boldly converting from an industrial powerhouse into a consumer-driven service economy -- may not be such a grand slam after all.
When it comes to a post-industrial economy adapting to a financial crisis of this magnitude, the world has no clear precedent. The wheels of industry were instrumental in churning our way out of the first Great Depression, and as long as they remain popped tires, I believe that all roads will lead to a bumpy, jobless, and prolonged process of recovery.
Snapshot: The state of American industry
We would need a report as thick as the health-care bill to detail the comprehensive status of domestic industrial activity, so for our purposes, we turn to key bellwether sectors for reliable indications of where we stand.
Fools will recall that the $787 billion stimulus package enacted last January was billed in part as emergency support for the industrial sector, with the nation's long-neglected infrastructure seen as a major beneficiary. At the time, I expressed my doubts. Eight months later, Steel Dynamics (Nasdaq: STLD ) indicates that they have yet to see any stimulation from the program. With a noteworthy uptick in demand fueled by inventory de-stocking (and a likely boost from the Cash for Clunkers program), Steel Dynamics recently raised third-quarter guidance by nearly 50% … while the fourth quarter remains too tough to call.
Even without evidence of successful stimulus, the steel industry has rebounded decisively from its deepest production cuts. United States Steel (NYSE: X ) reported a breathtaking 33.5% capacity utilization last January, reflecting a nation momentarily frozen like a deer in headlights. Scrappy competitor Nucor (NYSE: NUE ) later called a bottom after watching its utilization rate improve sequentially from 38% in April to 54% in June. Overall capacity utilization for the domestic steel industry at large is now estimated at 56%.
Mining equipment maker Joy Global (Nasdaq: JOYG ) , always a reliable source for keen insight into the state of global industry, helps to place these developments in context. While reporting impressively robust fiscal third-quarter results earlier this month, Joy Global confirmed the inventory de-stocking effect as the key driver of improved domestic steelmaking activity and noted a spillover effect on demand for iron ore and coking coal.
The keystone of Joy Global's perspective is a forecast that, in terms of timing, the end of the inventory de-stocking cycle in the U.S., with its resulting demand boost, coincides well with a likely moderation of commodity demand from China after a major effort to build stockpiles there while prices remained low. In other words, the U.S. is poised to play its role in stabilizing global commodity demand as China takes something of a breather, with the possibility that some effect from the stimulus program will finally come through and carry the torch further. We're building the bridge as we cross it, and the entire world has a stake in its successful construction.
For still greater confirmation, we look to miner Cliffs Natural Resources (NYSE: CLF ) , which last week raised its sales forecast for iron ore from North American operations from under 14 million tons to 16 million tons. Even more impressive was the company's anticipated 38% increase to production volumes of coking coal, from 1.3 million tons to 1.8 million tons. The miner remains cautious, matching production to real-time demand, but the near-term business outlook for steel-related commodity miners has visibly improved. Helping to console battered coal investors, my long-running domestic pick CONSOL Energy (NYSE: CNX ) has analysts looking to a strong year ahead.
Is this train bound for glory?
After the tracks ceased plunging into a deep ravine, freight activity on the nation's railways has improved demonstrably. Not surprisingly, carriage of automobiles has moved swiftly into positive territory from prior-year levels on the heels of cash for clunkers. In a more surprising but welcomed development, though, freight volumes across all categories have improved during recent weeks. If this trend continues, I look forward to reversing my decidedly cautionary stance with respect to railroad stocks. Shares of quality operators like Burlington Northern Santa Fe (NYSE: BNI ) are already running full speed ahead, but this Fool would rather be sure than early.
Like big engines that could, American industries are collectively forging a valiant effort to climb perhaps the steepest grade ever conceived. Effective execution of the existing stimulus program, targeting optimized benefit to the industrial base at large, would (in this Fool's opinion) come as a welcome shift from the extended gestation period that the sectors have already endured. Of course, after trillions of dollars were allocated to prop up the financial sector, America's industrial base knows just where it stands in the official pecking order.
As the nation struggles to eek recovery from the ashes of a still-raging inferno, the reduced scale of the industrial base presents special challenges to the overall outlook for employment and sustainable recovery. Without a firm commitment to rebuilding industrial production and capacity, alongside a necessary emphasis on environmental stewardship, I maintain that all purported engines of economic recovery will turn out to be clunkers.