What Is the Industrial Goods Sector?

The industrial goods sector is a category of stocks of companies who produce capital goods used in construction and manufacturing. Businesses in the industrial goods sector make and sell machinery, equipment, and supplies that are used to produce other goods rather than sold directly to consumers.

Key Takeaways

  • The industrial goods sector is a category made up of companies that make or sell machinery, equipment, or supplies used in manufacturing and construction. 
  • The industrial goods sector normal declines during economic recessions, though its various subsectors often perform differently from one another.
  • Some of the largest companies in the world are found in this sector.

Understanding the Industrial Goods Sector

The industrial goods sector includes companies involved with aerospace and defense, industrial machinery, tools, lumber production, construction, waste management, manufactured housing, and cement and metal fabrication. Performance in the industrial goods sector is largely driven by supply and demand for building construction in the residential, commercial, and industrial real estate segments, as well as the demand for manufactured products.

When the economy contracts during recessions, activity in this sector drops because companies postpone expansion and produce fewer goods. However, with this sector covering a wide range of subsectors, there is usually at least one area of growth in the industrial goods sector. The industrial goods sector goes through life cycles that see different subsectors in growth phases.

The major stages of the growth cycle are accelerating growth, decelerating growth, accelerating decline, and decelerating decline. Investors do well when they pay attention to the industry trends and progression of the growth cycle. Companies in the accelerating growth and decelerating decline phases have the best performance and are given higher multiples due to their upcoming growth.

Many of the subsectors go through bullish growth cycles lasting for years before seeing a retraction. For example, the aerospace and homebuilding sectors have both gone through these cycles. Other areas, such as industrial conglomerates and waste management, have provided steady streams of revenue generation.

Tracking Industrial Goods Statistics

The Bureau of Labor Statistics (BLS) is a valuable resource for investors and analysts at the sector level. The industrial goods sector is listed as a whole and broken down by subsector in reports. The BLS provides information such as employment, union membership, growth projections, hourly wages, and fatalities/injuries. Investors can interpret these statistics to determine growth cycles. The U.S. Census Bureau publishes monthly data on new orders of capital goods, broken down into various subsectors, which can provide powerful insights into long- and short-term trends in the industrial goods sector.

Large Industrial Goods Companies

The industrial goods sector includes some of the largest companies in the United States. General Electric ranked 18th on the 2017 Fortune 500 list of top revenue-producing companies, with $122.3 billion. It has been a staple on the Fortune 500, making the top 10 every year since 1995, until it fell to 11th in 2015.

Ways to Invest in Industrial Goods

The MSCI USA Industrials Index is the common benchmark for the industry. This index gained an average of 10.5% annually from 2010 to 2015. Investors can invest in individual industrial goods stocks or look to mutual funds and exchange-traded funds (ETFs). Fund offerings cover the entire industrial goods sector and some cover subsectors of the industry as well, such as aerospace. The Industrial Select Sector SPDR Fund and Vanguard Industrials ETF are two of the largest funds tracking the sector.