What is a Smokestack Industry

A smokestack industry is a traditional heavy manufacturing industry that produces heavy machinery, large items or inputs into other industries. Examples include cars, shipbuilding, steel and other metals, chemicals and heavy machinery. In short, any heavy manufacturing industry that has been around for decades. Such industries tend to cause heavy pollution: the typical images of these industries are factories that have banks of chimney stacks emitting smoke into the atmosphere, hence the term "smokestack".

BREAKING DOWN Smokestack Industry

Smokestack industries traditionally have also been labor-intensive producers. Some still are, though others (such as automobile manufacturers) have become significant users of technology in their production lines. The notion of such industries as large employers is sometimes used as a justification for government or state policies to attract, protect or otherwise support these industries in some countries or regions.

A smokestack industry, while still vital to the economy, is usually viewed by investors as an "old economy" business, with limited potential for long-term growth. Such "old economy" companies tend to center around manufacturing, whereas "new economy" companies tend to focus on services.

Smokestack industries are generally perceived as having a high degree of cyclicality, since their fortunes are usually dependent on the state of the broad economy. For those producers of items that are exported, either as final products or as inputs into the global manufacturing supply chain, global economic growth is important as well as domestic growth. During periods of economic expansion, smokestack industry stocks tend to perform well, delivering healthy levels of earnings and cash flow. However, as cyclical industries, they tend to under-perform during recessionary times, due to declines in revenue, earnings and cash flow. In the stock market, smokestack industries will generally be classified under the Basic Materials, Energy, and Industrials sectors.