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Industrial CEOs Look to Juggle Uncertainties, Sector Shifts

Oct. 31, 2023
‘We are probably overusing the word dynamic,” Stanley Black & Decker’s Don Allan told analysts last week in sketching out his team’s view of market trends.

With the apparent end of the United Auto Workers’ strike against the Detroit Three automakers, Michael Larsen can scratch one item off his list of headwinds.

It’s a small solace, though, for the CFO of Illinois Tool Works Inc. Speaking to analysts last week, Larsen ticked through other factors creating an unusual mix of uncertainty about demand for ITW’s vast range of automotive, food, testing and other equipment: Some of ITW’s customers are working down inventories, a rebound in semiconductor business has been pushed out, higher interest rates are beginning to bite and, given expectations of a slowing economy late this year and early next, CEOs have grown more cautious in general about capital spending.

Several of Larsen’s peers across the industrial sector have tallied similar concerns on their recent earnings conference calls. No one is ringing the alarm bell—the “fairly tepid” assessment from Fastenal’s leadership team in mid-October is a common thread—but the warnings about inventory normalization and a more careful posture on 2024 have sounded similar from one call to the next. Some executives, including those at truck builders Paccar and Traton, also are still dealing with very persistent supply-chain pain.

“We are probably overusing the word dynamic, but I think it’s an appropriate word to describe the current market situation,” Stanley Black & Decker Inc. President and CEO Don Allan said on his team’s conference call. “There’s a lot of different shifts happening.”

The Stanley Black & Decker team, Allan said, is seeing strength in its professional tools, aerospace and fastener businesses, among others, but its outdoor and consumer tools units are struggling by comparison. The third-quarter story at 3M was much the same, CFO Monish Patolawala said. Weakness among electronics customers, lower sales of masking tape and a soft back-to-school season were balanced in part by good numbers from 3M’s automotive and aerospace units.

Looking to 2024, the consensus among these executives and several others who have reported earnings of late is for more of the same mélange. As Allan put it: “We are expecting a similar stable-ish type macro environment with some dynamic elements around it.”

Those “dynamic elements” also bubbled up in the Federal Reserve Bank of Dallas’ Texas Manufacturing Outlook Survey published Oct. 30. The report paints a paradoxical picture of production growing again after a summer dip while new orders remain negative and “perceptions of broader business conditions continued to worsen” even though they’ve been negative for a year and half.

And yet: The factory leaders surveyed by Fed researchers said they are, on the whole, growing more positive about future activity. The number of executives who this month said they will lift their capex between now and April was twice that of those looking to cut back.

Longer-term trends such as electrification and automation are helping sustain some of those plans: Eaton Corp. Chairman and CEO Craig Arnold on Oct. 31 said his team is investing more than $1 billion to expand the company’s capacity to make products used in electrification, energy transition and digitalization projects. And one of ITW’s competitors, Lincoln Electric Holdings Inc., also cited automation as a big factor in its strong third quarter—with execs also saying that the fundamental strength of many of their end markets would have further lifted Lincoln’s numbers but for the fact that this year’s Q3 had fewer shipping days than 2022’s.

“We are seeing solid momentum in […] October order rates,” COO Steve Hedlund said of Lincoln’s welding group. “We will also see an acceleration of scheduled automation deliveries in the fourth quarter […] and we continue to maintain high backlog levels.”

And yes, for the record: Hedlund also used ‘dynamic’ in assessing the market forces facing his team. It sounds like we should get used to hearing that word.

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