Why the Industrial Sector can be Critical to the Economy

The buildings you live in, the trains you take to work, and the machines that make your clothes are all powered by one sector: industrial goods. 

The industrial goods sector, also known as the industrial sector, includes companies that make and sell tools and products used by other industries, particularly in manufacturing and construction. While you as a consumer don’t necessarily directly interact with the industrial sector, it allows other vital parts of the economy to function. Aerospace and defense, homebuilding, electric equipment, machinery, construction, and engineering businesses all belong to the industrial sector. 

The biggest contributors to the industrial sector

The Dow Jones Industrial Average (DJIA), also known as the Dow, is one of the best-known stock market indices, measuring the health of the stock market. The Dow was first created in 1896 with only 12 companies, all in the industrial sector. Today, the Dow has expanded to include 30 of the biggest companies across various sectors that are traded on the New York Stock Exchange (NYSE) and the NASDAQ. 

Here are some of the biggest industrial companies that are part of the Dow: 

• 3M makes household products such as Scotch tape in addition to construction and design materials and manufacturing products. This company has a market capitalization of $106.7 billion.
• Aerospace company Boeing makes aircrafts for commercial and defense purposes. Boeing has a market cap of $124.8 billion.
• Caterpillar, which owns brands such as Cat, makes construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. The company has a market cap of $113 billion.
• Honeywell International, with a market cap of $153.6 billion, is a conglomerate that works in aerospace, construction, and manufacturing. Honeywell also manufactures products for buildings, like electrical devices and air filtration systems. 

Other big players in this industry, outside of the Dow, are: 

• Logistics company United Parcel Services (UPS) offers shipping services to individuals and businesses. With a market cap of $169 billion, UPS delivers mail and packages to 220 countries and territories. 
• Union Pacific Corporation is a North American railroad franchise that connects 23 states in the western two-thirds of the U.S., powering supply chains. Operating 8,300 locomotives over 32,000 miles, Union Pacific has a market cap of $133.1 billion. 
• Aerospace and defense company Raytheon Technologies works in areas such as artificial intelligence, advanced propulsion, electrification, and thermal management. Raytheon’s market cap is $127.7 billion. 
• With a market cap of $112 billion, General Electric Company’s chief industrial segments include power, renewable energy, and aviation. General Electric also builds engines for commercial planes, as well as military ones.
• Deere & Company, which has a market cap of $111 billion, makes lawn, agriculture, and construction equipment, among other things. Deere makes products for consumers as well as companies, such as forestry and landscaping businesses. 

Industrial goods by the numbers

Of the S&P 500, which is one of the market’s main bellwethers, the industrial sector is the sixth largest of the 11 sectors that make up the index. Industrial goods contribute 8.4% of the overall index. The sector covers a wide range of industries: aerospace and defense, air freight and logistics, airlines, building products, commercial services and supplies, construction and engineering, electrical equipment, industrial conglomerates, machinery, marine equipment, professional services, road and rail equipment, trading companies and distributors, and transportation infrastructure. 

As of the first quarter of 2021, the economic output of the industrial sector was $9.6 trillion, with $6.4 trillion of that value coming from manufacturing, $1.9 trillion coming from construction, and $1.3 trillion from transportation and warehousing. Manufacturing includes durable goods such as machinery, electrical equipment, and transportation equipment, as well as nondurable goods such as textiles, plastics, rubbers, and more. Air, rail, water, truck, transit and ground passenger, pipeline transportation make up transportation. 

The industrial sector employs more than 20.2 million people in the U.S. Of those 20.2 million, more than half a million work in mining, about 7.3 million work in construction, and roughly 12.2 million work in manufacturing. These workers are the people who operate cranes at construction sites, the engineers that build the machinery that operates airplanes, and more. 

Investing in industrial goods

Investing in the industrial sector can give your portfolio exposure to industries that are vital to the economy, such as transportation and construction. However, this sector can tend to be cyclical, meaning that it responds to the movements of the overall market. So when the economy is doing well, industrial sector stocks may also tend to perform well. And when the economy takes a dip, this sector may also tend to drop.

For example, during the Covid-19 pandemic, the industrial sector has taken a hit. At the start of the pandemic, in April 2020, industrial production dropped 16.5% year-over-year. While industrial production has started to recover, it still hasn’t reached pre-pandemic levels. 

With Stash, you can invest in the stocks and exchange-traded funds (ETFs) in the industrial sector. Whether you invest in industrial goods or not, it’s important to make sure your portfolio is diversified across various sectors of the economy and different regions of the world. Keep in mind that all investing involves risk and potential loss. Follow Stash’s investment philosophy the Stash Way by investing small amounts regularly in a diversified portfolio.

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