Moody's: Negative North American manufacturing outlook reflects weak demand

Moody's Investors Service has changed its outlook for the North American manufacturing sector to negative from stable on weakening demand in key end markets, where prospects are already weak for some segments and moderate but weakening for others, which will result in earnings volatility and generally flattish growth.

The sustained drop in crude oil prices has significantly reduced demand in the exploration and production end markets, weakening growth prospects for mid- and downstream operators as well. Demand for farming and earth-moving equipment has also waned.

"Almost two-thirds of the segments served by our rated companies are approaching negative territory," said Chris Wimmer, a Moody's Vice President and Senior Credit Officer. "And we see no growth catalysts on the horizon that would improve business prospects for the sector."

Manufacturers are likely to reduce costs and delay investment, exacerbating an already weak operating environment, , according to the report "North American Manufacturing Changing Outlook to Negative On Flat Growth, Weakness in Key Markets." But because companies have been cutting costs to boost cash flow for years now, it is unlikely that enough inefficiencies remain for companies to cut their way to EBITDA growth without stronger fundamentals.

"Only two segments in the North American manufacturing sector face strong growth prospects," said Wimmer. "The commercial aerospace segment will benefit from strong demand from commercial airlines, and the HVAC segment from the transition to the new seasonal energy efficiency ratio requirements."