The Manufacturing Boom Will Boost One Critical Sector

Editor's note: As Joel Litman from our corporate affiliate Altimetry points out, the manufacturing industry has seen jumps in both demand and investment... but one desperate shortage threatens to cut its growth short. In this issue, originally published in the August 19 edition of Altimetry Daily Authority, Joel explains how this setup is creating danger – and opportunity.

America's industrial revival has been largely powered by AI...

Every new data center requires servers, cooling systems, backup generators, electrical equipment, and loads of supporting infrastructure.

The demand for those components flows through supply chains to American manufacturers. But AI isn't the only reason the industrial sector is gaining momentum.

Major industrial manufacturers GE Aerospace (GE) and 3M (MMM) both crushed their earnings expectations in the second quarter thanks to strong demand across a diverse mix of products, including adhesives, safety gear, and jet engines.

This rebound is pushing ahead despite trade barriers, persistent inflation, and higher energy prices caused by the Iran conflict.

It's the strongest manufacturing cycle we've seen in years. But it's running into competition for a vital resource... electricity.

Factories need a lot of it. But data centers need even more of it. The power grid is struggling to keep pace with the AI build-out.

Today, I'll explain why electricity has become the decisive constraint in America's manufacturing boom... and how that bottleneck will shape the next wave of industrial winners.

Reinvestment Powers the Industrial Turnaround

The manufacturing recovery has been in full force all year...

The Institute for Supply Management's manufacturing index has remained above 50 for seven consecutive months. That means the manufacturing sector is expanding. Before that, we saw a 10-month period of contraction for the sector.

The State Street Industrial Select Sector SPDR Fund (XLI) is up more than 18% year to date.

As I mentioned earlier, major manufacturers in particular have had a strong year. 3M recently reported its best earnings performance in 19 quarters... And GE Aerospace increased its first-half revenue by 27% and saw its order backlog jump 49%.

Funding in the sector is also growing. Private investment in industrial equipment has now posted annual growth above 10% for three straight quarters for the first time since 2012. Take a look...

As you can see in the chart, there was a surge in industrials investing in early 2021 as the world emerged from the pandemic. Investments then cooled off before peaking again around 12% in October 2022, before higher interest rates slowed the sector's growth.

Over the past two quarters, equipment spending has climbed back toward 13% annual growth.

Companies are putting money into equipment for uses like information-processing and industrial machinery. They want to strengthen domestic supply chains and raise productivity. AI is accelerating those changes because of how much physical infrastructure it requires.

The conflict with Iran has also increased equipment demand. The need for electricity is surging... And higher energy prices are helping utilities and independent producers fund their investments in power-generation machinery and grid infrastructure.

The appetite to build is clear. The downside is, without more energy, it won't last much longer.

The manufacturing boom depends on cheap electricity...

Manufacturing investment is concentrated in regions with strong workforces and low-cost power. But both of those are becoming scarcer.

From 2014 to 2023, the amount of electricity generated by major utilities was essentially flat... Demand grew just 1.2% from 2014 to 2019. Generation finally broke out of that trend in 2024, rising 3% year over year.

That modest pace leaves little room for a surge driven by data-center and factory construction.

Every one of those projects eventually runs into the same bottleneck – dependable power.

The next industrial winners will be those with access to reliable electricity...

Companies are reshoring manufacturing and rebuilding energy infrastructure. The power grid will determine how far that expansion goes.

That puts the major energy players at the center of the industrial renaissance... including power producers, turbine manufacturers, electrical-equipment suppliers, grid contractors, and energy-infrastructure companies.

Simply put, investors should focus on the businesses helping factories and data centers secure reliable power.

Those companies will have healthy backlogs of demand for years to come.

Regards,

Joel Litman

Editor's note: When SpaceX went public in June, all of the headlines were about its sky-high valuation and the $75 billion it raised. Lost in the shuffle were Elon Musk's plans for those funds. On August 27, Joel is going on camera to reveal how Musk is likely to target key bottlenecks in memory chips, computing infrastructure, and more... Reserve your spot now ahead of the big day.