Industrial Sector

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21 Aug, 2024

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Industrial Sector Definition

The Industrials sector comprises firms and companies operating in manufacturing capital goods and machinery that are used for producing other goods. The main objective of this sector is to produce goods, resources, and services that are indirectly beneficial to the end customer.

The main types of industrials sector include automotive, aerospace, chemical, construction, and others. The products are sold directly to large firms instead of retail consumers. Even though this sector is volatile to the economic cycles, the firms involved make huge profits. However, it is also strongly affected by market forces.

Industrial Sector Definition

The industrials sector comprises companies engaged in the manufacturing and production of capital goods like aerospace equipment, automotive parts, construction, logistics, and others.
Its main aim is to produce goods that other firms can use as primary goods. The industrial sectors include aerospace, chemical, construction, and automotive.
It acts as a primary, price-weighted average and concentrates more on the Dow Jones stock market index of the United States.
The manufacturing sector is the focus of the industrial group. However, the materials sector also engages in the manufacture, albeit of raw materials.

Industrials Goods Sector Explained

The industrial sector refers to companies and firms manufacturing capital goods like machinery, chemicals, and construction. One of the famous stock market indexes, "The Dow Jones," a price-weighted average, heavily depends on this sector. However, the demand and supply of this sector depend on the cycles of inflation and economic recession.

The industrial sector includes the production of defense equipment in the aerospace, construction business, machinery, electrical equipment, and others. In addition, it also renders commercial and professional services. It also involves business in the railways, airlines, air freight, and logistics. According to the July 2019 S&P data, capital goods constituted at least 70.18% of the industrial sector. In contrast, transportation industries took 22.48%. And the rest (i.e., 7.33%) belonged to commerce and professional services.

Among the equities in the Dow Jones, industrials sector stocks are the sixth most weighted. It comprises around 9.20% of the total index share. The major industrial sector stocks include Honeywell International Ltd, Boeing Co., Union Pacific Corporation, Caterpillar Inc, Lockheed Martin, and others. However, in the sub-category range, companies in aerospace acquired a major share of 29.1%. Several exchange-traded funds (ETFs) are also included in industrial stocks.

To invest in these stocks, a person must first open a trading account with a selective broker. Likewise, they should research and select the right stocks from the industrials sector list. Then they should invest a selected amount in these stocks and track them frequently. These may include Fidelity MSCI industrial ETF (FIDU), Industrial Select Sector SPDR ETF (XLI), iShares US Aerospace & Defense ETF (ITA), and others.

Examples

Let us look at some examples to understand the concept better:

Example #1

Suppose four major industries are dominating the industry sector. Some include Boeing Corp., Caterpillar Corp., Lockheed Martin, and CSX Corporation. Each belongs to aerospace, construction, or a conglomerate of various companies. So, if the demand or supply of any of these companies fluctuates, it will affect the overall Dow Jones Index and other markets.

For example, considering the shortage of raw materials for Boeing Corp, the shares of its customers will also fall. Likewise, it will affect the supply of the overall aerospace industry. A similar case is for other companies. As a result, the fluctuation of the industrial sector will also affect the Dow Jones Index.

Example #2

On November 4, 2022, the international conglomerate Honeywell announced the launch of a sustainable solution for carbon emissions. These wireless leak detection sensors will monitor the real-time emissions and help them meet their targeted carbon reduction goals.

Industrial Sector vs Material Sector

Although these sectors make up the whole economy, they have huge differences. While the industrial group concentrates on the manufacturing sector, the latter behaves differently. The materials sector does engage in manufacturing but of raw materials. Therefore, it includes producing raw materials like paper, glass, cement, chemicals, steel, and others. In contrast, the former includes those companies producing capital goods for aerospace, automotive, construction, rail lines, and trucking.

Here, the companies produce machinery or capital goods that act as a primary good in their production. For example, Alex produces a baking oven used by Beckham to produce biscuits. Therefore, it involves the industrial sector. However, the raw materials used by Alex in that glass-covered oven refer to the materials sector.

	Industrials Sector	Materials Sector
Meaning	This sector includes industries operating in the manufacturing sector.	The materials sector comprises companies involved in the manufacturing of raw materials.
Consists of	Aerospace, automotive, rail lines, logistics, construction, commerce, and professional services.	It includes construction materials, paper, glass, minerals, mining, and metals like steel.
Belongs to	Dow Jones index	S&P 500 Materials

Frequently Asked Questions (FAQs)

Which industrial sector tends to promote business development naturally?

The household industrial sector is the only sector to promote small-scale business development naturally. As a result, those companies produce machinery that acts as primary goods in the FMCG (Food manufacturing and Consumer Goods).

How to improve the industrial sector?

To bring about industrial sector reforms, firms can increase the labor productivity of the business. Companies can improve their research and development (R&D). As a result, the firms can produce machines with good efficiency.

What is the contribution of the industrial sector to economic development?

It leads to a higher standard of living and growth in the economy. For example, if all the companies in the industrial group increase their efficiency, the end product will automatically inherit it. As a result, people will tend to buy products. And as a result, the gross domestic product (GDP) will also increase.