Peoria, Illinois-based Caterpillar, the world’s biggest maker of all things that dig and move earth, said today that revenue this year could be $3 billion more than analysts’ expected. Cleveland-based Eaton, a maker of power sytems and hydraulic equipment, said yesterday that end market demand will grow by 8 percent, up from its previous growth forecast for 2010 of 6 percent.
"While the U.S. economy is primarily service-based, manufacturing activity has an outsized impact on GDP growth due to its highly cyclical nature,” wrote Jonathan Golub, UBS equity strategist, in a note to clients this week. “Over the past 2-3 months, concerns regarding a double-dip recession have picked up significantly. We believe that these concerns are overblown and believe that the economy will continue to advance, perhaps at a slower pace."
UBS, which prides itself on being the so-called leader in proprietary industry surveys, cited end-demand channel checks showing continued improvement in the trucking, packaging, airplane maintenance, and construction renal equipment markets. These are among the first markets to see growth in the beginning to middle stages of an industrial cycle.
The Dow Jones Industrial Average jumped more than 200 points today as Caterpillar climbed more than two percent. The move came despite a weekly jobless survey showing bigger than expected losses, a bad sign for the service side of the economy. The best performers in the Dow this year are Caterpillar and Boeing.
Eaton "commented it is seeing no signs of a significant slow-down in any of its markets,” wrote Andrew Casey, a Wells Fargo analyst. “Management believes electrical- Americas is bottoming, and higher production rates are likely in truck and aerospace. Against all of this and a view that demand continues to slowly improve, we believe that our 2011 estimate of $6.25 is conservative."
More than 80 percent of the industrial companies in the S&P 500 that have reported earnings have topped analysts’ estimates, according to Bespoke Investment Group, the most of any sector.
Caterpillar, Boeing and Eaton shares are all up more than 18 percent this year. The third-best performer in the Dow behind Caterpillar and Boeing is the cheap consumer play McDonald’s, up 14 percent.
Here’s some clarity for the Fed Chairman. Clearly progress in emerging markets is continuing and there is a replacement cycle going on in the developed world, so the globe needs to dig, mine, build and ship again. And because of this, the manufacturing base in this country has at the very least stabilized. The consumer, where this housing & credit bubble was centered, will continue to struggle, but the usually overlooked industrial sector may keep us afloat.
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John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team