Definition of the industrial goods sector

What is the industrial goods sector?

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

Companies in the industrial goods sector manufacture and sell machinery, equipment and supplies that are used to produce other goods rather than selling them directly to consumers.

Key takeaways

  • The industrial goods sector is a category made up of companies that manufacture or sell machinery, equipment or supplies used in manufacturing and construction.
  • The industrial goods sector typically declines during economic recessions and increases during expansions, although its various subsectors may behave differently from each other.
  • Some of the largest companies in the world can be found in this sector, and the Dow Jones industrial index has historically been heavily weighted towards industrial stocks.

Understanding the industrial goods sector

The industrial goods sector includes companies related to the aerospace and defense industries, industrial machinery, tools, wood production, construction, waste management, manufactured housing, and cement and metal manufacturing. 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 demand for manufactured goods.

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

The main stages of the growth cycle are accelerated growth, slowed growth, accelerated decline, and slowed decline. Investors do well when they pay attention to industry trends and growth cycle progression. Companies in the accelerated growth and slowdown decline phases perform the best and are given higher multiples due to their upcoming growth.

Many of the subsectors go through bullish growth cycles that last for years before seeing a retraction. For example, the aerospace and home construction industries have been through these cycles. Other areas, such as industrial conglomerates and waste management, have provided steady streams of income generation.

Monitoring of industrial goods statistics

The Bureau of Labor Statistics (BLS) is a valuable resource for investors and analysts at the industry level. The industrial goods sector is listed as a whole and broken down by subsector in the 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 US Census Bureau publishes monthly data on new orders for capital goods, broken down into various subsectors, which can provide valuable information on long-term 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. They include General Electric, Honeywell, Union Pacific, Caterpillar, 3M, Dow Chemical, and Boeing.

In fact, the Dow Jones Industrial Average (DJIA) is a widely observed benchmark in the US containing 30 first-class stocks, heavily weighted by the industrial goods sector. When the index was initially launched in 1896, it included only 12 companies. Those companies were primarily in the industrial sector, including railways, cotton, gas, sugar, tobacco, and oil.

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

Ways to invest in industrial goods

The MSCI USA industrial 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 search for mutual funds and exchange-traded funds (ETFs). Fund offerings cover the entire industrial goods sector and some also cover industry subsectors, 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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Mark Holland

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