A Timely Glimpse of American Productivity

We stand at a key crossroads in America's storied voyage through the global financial crisis. Following a brief period of surprisingly strong bellwether industrial indicators -- from transportation to steelmakers -- troubling signs of weakness have again emerged to jostle equity markets and unnerve forlorn investors.

With the stakes for investors at ear-popping heights, awaiting third-quarter earnings results to develop a broad snapshot of the domestic economy is a tough pill to swallow. At times like these, discerning Fools pay added attention to bellwethers that utilize fiscal reporting periods that diverge from the corporate pack ... providing a timely glimpse of the real state of the American industrial landscape.

Earlier this month, mining equipment manufacturer Joy Global (Nasdaq: JOYG  ) reported encouraging signals from the domestic steel industry. Capacity utilization at the nation's steel mills had improved to a respectable 74%, and inventories showed room for further restocking. As we scrutinize this week's fiscal-third-quarter earnings release from metal scrapper and steelmaker Commercial Metals (NYSE: CMC  ) , however, we find troubling indications that the public sector may still be accounting for a major proportion of domestic steel production.

Similar to recent employment figures that were dominated by short-term Census workers on the taxpayers' payroll, a boost in steel production dominated by public works projects and some results of stimulus spending is not the growth Fools are looking for to identify a sustainable recovery in the American industrial complex.

Unfortunately, corroborating its own prior guidance, Commercial Metals cites those very sources to account for stronger shipment volumes (especially for rebar) in the third quarter, stating: "Active end markets continue to be heavily weighted toward public works while the private sector remains weak." Although a 13% sequential increase in domestic mill shipments is a welcome development, the underlying story still sounds nothing like the real recovery that key Asian steelmakers like POSCO (NYSE: PKX  ) have reported.

All told, Commercial Metals suffered a more modest loss than analysts had braced for. The first "substantial" operating profit ($15.8 million) for the metals recycling unit in seven quarters helped keep the consolidated loss to just $8.8 million. Scrap sales prices have risen sharply over prior-year levels (108% in the case of ferrous scrap), and a telling 36% of nonferrous scrap was exported overseas. Metal margins at domestic mills improved 15% sequentially, which leads this Fool to anticipate relatively strong third-quarter earnings from cost-efficient competitors Nucor (NYSE: NUE  ) and AK Steel (NYSE: AKS  ) .

I maintain that the state of American industry and any hope for sustainable recovery remain locked in the perpetual embrace of a shared common fate. Commercial Metals has again served to keep Fools' expectations in check by reminding us that "commercial and industrial markets continue to be plagued by high unemployment, illiquidity, high vacancy rates, and suboptimal manufacturing utilization." Until America as a nation begins to produce more and borrow less, I fail to see alternate scenarios from a deep double dip. Please vote in our Motley Poll and then share your thoughts in the comments section below.

Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly in the Motley Fool CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Nucor. Nucor is a Motley Fool Stock Advisor recommendation. POSCO is a former Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a stainless disclosure policy.


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