Rockwell Automation (ROK)

[Investorman]

Seeking Alpha
Bright Future for U.S. Industry as We Move from Consumer to Industrial Economy

The New York Times’ “Conflicting Signals About the Chinese Economy” reports that Chinese exports fell 25.7% last month, yet China is still trying to stimulate its industrial economy. At the same time, Federal Reserve Chairman Bernanke is about to embark on a $1T program to expand consumer credit. American consumers are balking at both, while defiantly increasing their savings rate to a near term record 5%.

The coordinated world economic plan appears to be focused at the American consumer pulling all nations out of a near depression. But fundamental changes will prevent this from happening. First, as reported by The Wall Street Journal’s “Lean Factories Find It Hard to Cut Jobs Even in a Slump”, American factories are running so efficiently that foreign low cost labor is becoming far less relevant than factories being close to their customers.

Second, the cost of transportation and long lead times often outweigh labor savings. Third, consumer deleveraging is leading to less predictable consumer spending patterns. Factories will need to prepare for small runs, higher levels of customizations and unpredictable reorder patterns.

The long production cycle, just-in-time manufacturing model exemplified by Toyota (TM) is now dead. China just does not realize this yet. Local highly flexible manufacturing will replace the lethargic dinosaur logistics and sourcing that signifies the Chinese-Wal-Mart (WMT) model of today. How much longer can Macy’s (M) order 9 months in advance for Christmas?

What’s even more disturbing is that the Fed is depending on a narrow slice of consumers to restart our historic consumer economy. Just like I wrote in "Fed Pushes Housing into Stronger Hands", the Fed is now trying to push consumer credit into the strongest hands. The TALF program is seeking triple-A rated securitizations targeted at consumers with FICO scores exceeding 660. These are the more responsible consumers that are deleveraging now and strengthening their balance sheets. Making auto loans available to these consumers is like “pushing on a string.”

The whole focus of pushing money into strong hands to stimulate the economy is flawed. Alternatively, promoting investment into long-term flexible manufacturing assets might not stimulate the economy as fast. But, at least we will begin the difficult transition back to an industrial based economy. The service based economic model of the last few decades was merely a charade for foreign financed drunken consumer indulgence.

America’s future is extremely bright for industrial process and control manufacturers such as Eaton (ETN), Ingersoll-Rand (IR), Parker Hannifin (PH) and Rockwell Automation (ROK).