Industrial Goods Sector: How It Works and How To Track It

What Is the Industrial Goods Sector?

The industrial goods sector includes stocks of companies that mainly produce capital goods used in manufacturing, resource extraction, and construction.

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 normally declines during economic recessions and rises during expansions, though its various subsectors can perform differently from one another.
  • Some of the largest companies in the world can be found in this sector, and the Dow Jones Industrial Index has historically been weighted heavily to industrial stocks.

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, Honeywell, Union Pacific, Caterpillar, 3M, Dow Chemical, and Boeing are included.

Indeed, the Dow Jones Industrial Average (DJIA) ) is a widely-watched benchmark index in the U.S. containing 30 blue-chip stocks, weighted heavily to the industrial goods sector. When the index initially launched in 1896, it included only 12 companies. Those companies were primarily in the industrial sector, including the railroads, cotton, gas, sugar, tobacco, and oil.

In the early 20th century, the performance of industrial companies was typically tied to the overall growth rate in the economy. That cemented the relationship between the Dow's performance and that of the overall economy. Even today, for many investors a strong-performing Dow equals a strong economy (while a weak-performing Dow indicates a slowing economy).

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.

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