U.S. Industrial Production and Sector Rotation: Navigating Weak Manufacturing with Yield-Seeking Strategies

The U.S. industrial production landscape in Q3 2025 reveals a tale of two sectors: capital goods manufacturers grappling with sluggish demand and underutilized capacity, while yield-seeking investors increasingly pivot toward income-generating assets like . This divergence underscores a critical opportunity for investors to rebalance portfolios in response to structural shifts in industrial activity and capital allocation.

The Manufacturing Slowdown: A Drag on Capital Goods

, . However, this growth masks underlying fragility. Durable goods production, a key component of capital goods, , while nondurable goods fell 0.1%. Business equipment production, , faces headwinds as construction and industrial machinery sectors struggle with high material costs and weak demand.

The Electrical Equipment sector, a for industrial capital spending, exemplifies this duality. While sales rose across most subcategories, margins were mixed, and M&A activity slowed to 117 deals in Q3 2025 (down from 147 in Q2). Energy efficiency trends and infrastructure modernization are driving demand for advanced electrical systems, but these gains are offset by oversupply in logistics real estate and slowing industrial rent growth. , signaling underutilized resources and weak pricing power.

Yield-Seeking Demand: Mortgage REITs as a Safe Harbor

As industrial production growth moderates, capital is increasingly flowing into income-generating assets. Mortgage REITs (mREITs) have emerged as beneficiaries of this shift, leveraging the market's transition from speculative development to stabilized operations. Despite a 7.5% national vacancy rate for industrial properties in Q3 2025, , with 89% of debt fixed-rate to insulate against rate volatility.

The industrial real estate cooling has also created attractive entry points for mREITs. Cap rates expanded to 6.0% in late 2025, reflecting a repricing of risk in a higher-rate environment. Smaller industrial units (under 50k SF) in urban markets like Nashville and Charlotte continue to outperform, with asking rents reaching $13.50 per square foot (NNN). For mREITs with disciplined capital allocation strategies, these segments offer a blend of yield and growth potential.

Strategic Allocation Shifts for Investors

1. Underweight Capital Goods Exposure: Investors should reduce allocations to capital goods sectors like Electrical Equipment, where demand is concentrated in high-value niches (semiconductors, aerospace) but vulnerable to broader manufacturing slowdowns. Defensive positioning in energy-efficient infrastructure and smart grid technologies may offer partial insulation.
2. Overweight Mortgage REITs: mREITs with a focus on high-yield, low-vacancy are well-positioned to capitalize on the sector's rebalancing. Prioritize REITs with and conservative leverage ratios to mitigate interest rate risks.
3. Hedge Against Rate Cuts: With Fed rate cuts expected in 2026, .

Conclusion: Balancing Growth and Income in a Divergent Market

The U.S. industrial slowdown is creating a bifurcated market: capital goods sectors face margin compression and underutilized capacity, while yield-seeking investors find refuge in industrial real estate. By strategically rotating into mREITs and hedging against rate cuts, investors can navigate this transition while capturing income and growth in a shifting economic landscape.