Manufacturers face 2007 headwinds

By Nick Zieminski

NEW YORK (Reuters) - Their products range in size from a tiny bearing in a dentist's drill to earth-moving machines the size of buildings.

U.S. manufacturers are all over the map in terms of product lines, business strategies and size -- and they are all over the map geographically, too.

But they have one thing in common: the past few years have been boom times, as demand for those machines has soared in markets as diverse as oil drilling, aerospace and mining, and companies have extended their geographic reach to profit from fast-growing markets in India, China and Eastern Europe.

Yet recent signs point to a slowdown, at least in North America, as a string of interest rate increases by the Federal Reserve takes its toll.

A weak housing market, meanwhile, has cut demand for equipment like diggers, air conditioners and tools, while a troubled U.S. auto industry has hurt companies with exposure to that sector.

"The first quarter or first half of the year is dicey for the economy," said analyst Eli Lustgarten, who follows large U.S. industrials for Longbow Research. "The industrial economy has slowed down. It is going through its mid-cycle, just as expected."

The extent of the current U.S. slowdown will be topic No. 1 at the Reuters Manufacturing Summit, starting Monday at Reuters' U.S. headquarters in New York.

Among chief executives attending the summit are some of the biggest names in U.S. industry.

Over the course of the week, these corporate leaders will discuss their strategies for profit growth, their outlook for mergers and acquisitions, and the role their international operations will play in coming years.

"Rising international sales can go a long way toward offsetting the U.S. slowdown during 2007," Deutsche Bank analyst Nigel Coe said in a research note previewing the year.

Coe, calling 2006 "a tough act to follow," said industrial companies will grow earnings per share by about 16 percent this year, down from 24 percent last year.

Stock buybacks, mergers and acquisitions, and a weak U.S. dollar will help support earnings, as will strong fundamentals in key industries like aerospace, energy and nonresidential construction.

Another key question facing industrials is what to do with their cash, which is estimated to top $600 billion among the 300 largest companies in the group.

Many have already raised dividends or announced big share buybacks, and the huge cash hoard may lead many companies to step up acquisitions this year, according to Standard & Poor's.