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Will ETFs Suffer as US Industrial Output Falls in September?

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The latest data on U.S. industrial output looks disappointing as the damages from Hurricane Ida and the ongoing health crisis continue to take a toll on the metric. The shortage in raw material supplies and labor due to the pandemic has remained a serious concern.

Per the Fed’s recently-released data, total industrial production declined 1.3% in September post declining 0.1% in August (revised downward from an increase of 0.4%). There was a 0.7% decline in manufacturing output amid the constrained supply of semiconductors and certain hurricane-induced temporary plant shutdowns. Going on, there was a 3.6% decrease in utility production on soft demand for air conditioning. There was a 2.3% decline in mining production.

Total industrial production increased at an annual rate of 4.3% in the third quarter of 2021. According to the Fed’s report, the durable manufacturing index was down 0.5% while the nondurable index declined 1%. Moreover, the index for other manufacturing (publishing and logging) slipped 0.2% in September.

Going on, capacity utilization for the industrial sector slipped 1% in September to 75.2%. The manufacturing capacity utilization for the industry, which is the measure for studying how efficiently firms are utilizing their resources, declined 0.6% in September to 75.9%, per the Fed’s report.

Present U.S. Economic Scenario

The third-quarter earnings season started with a bang. Per FactSet, this earnings season is expected to witness the third-highest quarterly profit growth rate of 30% for the S&P 500 companies since 2010 (as stated in a CNBC article).

In another encouraging development, the retail sales data came out to be remarkable. The metric rose 0.7% in September against the Dow Jones estimate of a 0.2% decline. This, in turn, marks a 13.9% increase from the year-ago figure (according to a CNBC article). After excluding auto-related sales, retail sales were up 0.8%, surpassing the 0.5% estimate and gaining 15.6% on a year-over-year basis.

Lower-than-expected weekly jobless claims were added to the list of positive economic data releases. Initial unemployment insurance claims in the week ending Oct 8 came in at 293,000, as mentioned in a CNBC article. According to the same article, the metric had slipped below the 300,000 level for the first time during the pandemic.

The latest ISM Manufacturing Purchasing Managers' Index (PMI) data for the United States paints a rosy picture of the U.S. economic recovery. According to a Reuters article, the metric rose to 61.1% in September from 59.9% in August and surpassed forecasts of a decrease to 59.6.

Any reading above 50% indicates expansion in U.S. manufacturing activities. The manufacturing sector, which makes up 12% of the U.S. economy, saw the reading rise for the 16th consecutive month.

The recently released minutes from the Federal Open Market Committee’s September meeting highlighted that the Fed might begin tapering the fiscal stimulus support program from mid-November.

The central bank is expected to roll back the month-end bond purchases by cutting $10 billion of $80 billion a month in Treasury’s and $5 billion from $40 billion a month in mortgage-backed securities (per a CNBC article). If everything goes well, the Fed expects to finish off tapering by mid-2022.

Investors seem continuously worried about the soaring inflation levels. Per the latest Labor Department report, the Consumer Price Index in September rose 5.4% year over year, higher than the Dow Jones estimate of a 5.3% rise, per a CNBC article. The metric touched the highest level since January 1991. It also increased 0.4% for the month, surpassing the 0.3% Dow Jones estimate. The escalating food and energy prices might be primarily responsible for the higher inflation levels.

Industrial ETFs in Focus

In the current scenario, we believe it is prudent to discuss ETFs that have relatively high exposure to the industrial companies discussed:

The Industrial Select Sector SPDR Fund (XLI - Free Report)

The fund seeks to provide investment results that, before expenses, match the performance of the Industrial Select Sector Index. Its AUM is $18.26 billion and expense ratio is 0.12% (read: 5 ETFs to Play the Key Events in Fourth Quarter).

Vanguard Industrials ETF (VIS - Free Report)                   

This fund offers exposure to the industrial sector and follows the MSCI US Investable Market Industrials 25/50 Index. Its AUM is $5.38 billion and expense ratio is 0.10% (read: Will Industrial ETFs Make Good Bets? Let's Find Out).

Fidelity MSCI Industrials Index ETF (FIDU - Free Report)

The Fidelity MSCI Industrials Index ETF seeks to provide investment returns that match, before fees and expenses, the performance of the MSCI USA IMI Industrials Index. Its AUM is $852.1 million and expense ratio, 0.08%.

iShares U.S. Industrials ETF (IYJ - Free Report)

The iShares U.S. Industrials ETF seeks to track the investment results of the Russell 1000 Industrials 40 Act 15/22.5 Daily Capped Index. Its AUM is $1.67 billion and expense ratio is 0.41%, as stated in the prospectus.

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