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

What Is the Industrial Goods Sector?

The industrial goods sector is a broad sector of the economy. This sector is made up of companies that provide capital goods used in the manufacturing, construction, and production of goods and services. These goods include machinery, equipment, and supplies. Subsectors of the industrial goods sector include aerospace, construction, and home building.

Understanding the Industrial Goods Sector

As noted above, the industrial goods sector is made up of companies involved in the manufacturing and construction of finished goods and services. These are products that are used directly by consumers. The sector includes companies involved with manufacturing capital goods, such as aerospace and defense goods and building 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.

Industrial Goods Sector 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 the goods-producing industry and is broken down by subsector in its reports.

The BLS provides information like employment, union membership, growth projections, hourly wages, and fatalities/injuries. Investors can interpret these statistics to determine growth cycles. As of April 2024, the industry employed 21.82 million people, including 15.54 million people in production and non-supervisory roles.

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. The agency reported $100.42 billion in new orders of capital goods.

Subsectors of the Industrial Goods Sector

As noted above, the industrial goods sector includes the following subsectors:

• Aerospace and defense
• Industrial machinery and tools
• Lumber production
• Construction
• Waste management
• Manufactured housing
• Cement and metal fabrication

The industrial goods sector includes some of the largest companies in the United States. Some examples include Honeywell (HON), Union Pacific (UNP), Caterpillar (CAT), 3M (MMM), and Boeing (BA).

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 index's performance and that of the overall economy. Even today, a strong-performing Dow equals a strong economy while a weak-performing Dow indicates a slowing economy for many investors.

How to Invest in the Industrial Goods Sector

The MSCI USA Industrials Index is the common benchmark for the industry. The index returned 10.11% on a 10-year basis and 10.93% over five years as of April 30, 2024. The index is made up of 96 constituents with a median market capitalization of $29.95 billion.

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.

The Bottom Line

The industrial goods sector is a key part of the overall economy. Companies that operate in this space are responsible for manufacturing the capital goods—machinery and equipment—for many of the finished goods we need in our everyday lives. This includes things like clothing, cars, planes, trains, and food. Although some companies are affected by changing trends in the economy, others are shielded from negative growth. If you're interested in investing in the sector, consider stocks, mutual funds, and ETFs of companies that operate in this space.