In September 2023, the ISM Manufacturing PMI rose to 49 from the previous month's 47.6, beating market expectations of 47.8. This improvement pointed to the slowest contraction in the United States manufacturing sector over the past ten months, per tradingeconomics.

However, investors should note that this data still reflects almost a year of successive monthly shrinkages in the U.S. factory activity, highlighting the adverse impact of higher borrowing costs imposed by the Federal Reserve.

Despite slumping for the 13th consecutive month, new orders fell at a substantially slower rate due to changes in the supply chain environment, which encouraged customers to initiate more projects. As a result, production recoiled considerably compared to the stagnation observed in August, marking the most substantial growth since July 2022. This rebound was further reinforced by the rapid depletion of backlogs.

Employment also showed resilience, recoiling after experiencing three periods of contraction. Meanwhile, the decline in prices continued for five months in a row, raising optimism among manufacturers about the chances of reaping larger profit margins.

The five manufacturing industries that reported growth in September are: Nonmetallic Mineral Products; Food, Beverage & Tobacco Products; Textile Mills; Primary Metals; and Petroleum & Coal Products. Against this backdrop, below we highlight a few sectors that should emerge winners in light of the latest U.S. manufacturing data.

Sector ETFs in Focus

Food, Beverage & Tobacco Products – Invesco Dynamic Food & Beverage ETF (PBJ Quick QuotePBJ - Free Report)

Though the business in the first half of 2023 in the United States was soft, the second half is likely to be better. We believe that the business for this segment is likely to be less impacted by slowdown fears as most companies hailing from this segment come either from the staples sector or from vice industries. And both sectors perform better in a recessionary environment. Industry survey revealed that material cost increases are not broad-based currently as they were before due to inflation.

The underlying Dynamic Food & Beverage Intellidex Index comprises stocks of 30 U.S. food and beverage companies. The fund charges 63 bps in fees.

Petroleum & Coal Products – SPDR S&P Oil & Gas Equipment & Services ETF (XES Quick QuoteXES - Free Report)

Though the industry survey revealed that “most plants are buying less material or reducing consumption in the name of sustainability, as well as running at 80 percent of capacity,” demand may go up due to the higher energy consumption in the upcoming winter weather, which will result in higher heating demand.

The underlying S&P Oil & Gas Equipment & Services Select Industry Index represents the oil and gas equipment and services sub-industry portion of the S&P Total Markets Index. The fund charges 35 bps in fees.

Materials – SPDR S&P Metals & Mining ETF (XME Quick QuoteXME - Free Report)

Survey for Primary Metal Products revealed that business conditions and market demand remain strong. The underlying S&P Metals & Mining Select Industry Index represents the metals and mining sub-industry portion of the S&P Total Market Index. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, American Stock Exchange, NASDAQ National Market and the NASDAQ Small Cap exchanges. The Metals & Mining Index is a modified equal-weight index. The fund charges 35 bps in fees.

Textile Mills (Apparel) – SPDR S&P Retail ETF (XRT Quick QuoteXRT - Free Report)

The demand for apparel should be high as the industry of textile mills reported manufacturing growth in September. Customers' inventories were too low in September. The industry also paid lower prices for raw materials. All these factors indicate the upbeat apparel sales environment. The fund XRT has 23.37% weights in apparel stocks.