What Is the Industrial Goods Sector?

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What Is the Industrial Goods Sector?

Let me explain the industrial goods sector directly to you. It's a broad part of the economy where companies produce capital goods for manufacturing, construction, and other production activities. These include machinery, equipment, and supplies. You'll find subsectors like aerospace, construction, and home building in this area.

Key Takeaways

Here's what you need to know: This sector handles the manufacturing and production of capital goods. Companies here sell machinery, equipment, or supplies for manufacturing and construction. The sector typically drops during economic recessions and climbs during expansions, but subsectors can behave differently. Some of the world's largest companies are in this sector, and the Dow Jones Industrial Average has long been heavy on industrial stocks.

Understanding the Industrial Goods Sector

As I mentioned, this sector involves companies in manufacturing and construction of finished goods and services used by consumers. It covers capital goods like aerospace and defense products, plus building materials. When the economy shrinks in recessions, activity here falls because companies delay expansions and cut production. But since it spans many subsectors, there's often growth somewhere. The sector cycles through phases: accelerating growth, decelerating growth, accelerating decline, and decelerating decline. You should watch industry trends and these cycles if you're investing. Companies in accelerating growth or decelerating decline phases perform best and get higher valuations due to their potential. Many subsectors enjoy long bullish periods before pulling back—for instance, aerospace and homebuilding have seen this. Others, like industrial conglomerates and waste management, deliver steady revenue.

Important Factors Driving Performance

The sector's performance depends heavily on supply and demand for building in residential, commercial, and industrial real estate, plus demand for manufactured products.

Industrial Goods Sector Statistics

You can rely on the Bureau of Labor Statistics (BLS) for sector-level data. It lists industrial goods as goods-producing industries, broken down by subsector. The BLS covers employment, union membership, growth projections, wages, and injuries/fatalities, which help you spot growth cycles. As of April 2024, the industry employed 21.82 million people, with 15.54 million in production and non-supervisory roles. The U.S. Census Bureau issues monthly data on new capital goods orders, divided by subsectors, offering insights into trends. They reported $100.42 billion in new orders recently.

Subsectors of the Industrial Goods Sector

This sector includes subsectors such as aerospace and defense, industrial machinery and tools, lumber production, construction, waste management, manufactured housing, and cement and metal fabrication. It features some of the largest U.S. companies, like Honeywell (HON), Union Pacific (UNP), Caterpillar (CAT), 3M (MMM), and Boeing (BA). The Dow Jones Industrial Average (DJIA), a key benchmark with 30 blue-chip stocks, is weighted toward industrials. Started in 1896 with 12 industrial companies like railroads and oil, its performance has long mirrored economic growth. Today, a strong Dow signals a robust economy, while a weak one points to slowdowns.

How to Invest in the Industrial Goods Sector

The MSCI USA Industrials Index benchmarks the industry, with 10.11% returns over 10 years and 10.93% over five years as of April 30, 2024. It has 96 constituents and a median market cap of $29.95 billion. You can invest in individual stocks or opt for mutual funds and ETFs covering the sector or subsectors like aerospace. Major ones include the Industrial Select Sector SPDR Fund and Vanguard Industrials ETF.

How Important Is the Industrial Goods Sector?

Even if you as a consumer don't interact directly with it, this sector is crucial. It supplies the capital goods—equipment and machinery—that producers need to make planes, trucks, clothing, tools, and daily essentials.

What Are Capital Goods?

Capital goods are items used to produce other goods and services. They're durable, tangible assets like machinery, buildings, and equipment, including non-fixed ones like digital systems or service tools such as painting equipment and musical instruments.

What Are Some Companies in the Industrial Goods Sector?

Major global companies here include Honeywell, 3M, Caterpillar, and Boeing. They manufacture capital goods that other firms use to create consumer products.

The Bottom Line

This sector is essential to the economy, producing capital goods like machinery and equipment for everyday items such as clothing, cars, planes, trains, and food. Some companies face economic shifts, while others stay stable. If you're looking to invest, consider stocks, mutual funds, or ETFs in this space.

What Is the Industrial Goods Sector?

Highlights