Navigating the U.S. Industrial Recovery: Utilities and Strategic Manufacturing Plays in Focus

The U.S. industrial sector's June 2025 rebound, driven by a surge in utilities output and pockets of manufacturing resilience, marks a critical inflection point for investors. While Federal Reserve data highlights lingering challenges in mining and broader capacity underutilization, the shift from survey-based pessimism to hard data optimism is redefining sector-specific investment opportunities. This article explores how utilities and select manufacturing sub-sectors are emerging as strategic allocations, supported by improving trends and underappreciated valuations, while cautioning against exposure to mining's headwinds.

Utilities: A Hidden Growth Engine Amid Capacity Undervaluation

Utilities output surged by 2.8% in June, reversing May's 2.5% decline and contributing to the broader industrial rebound. The sector's capacity utilization rose to 71.0%, though it remains 13 percentage points below its historical average, signaling significant upside potential as demand stabilizes. Key drivers include grid modernization investments and seasonal cooling needs, which have historically amplified energy demand.

Investors should prioritize utilities focused on grid resilience and renewable integration, such as NextEra Energy (NEE) or Dominion Energy (D), which are positioned to benefit from federal infrastructure spending and rising electrification trends. .

The Federal Reserve's data underscores utilities' undervaluation: despite the June surge, the sector's utilization rate lags its long-term average, implying room for expansion without immediate capacity constraints. Wells Fargo analysts note that lower oil prices and tax cuts could further bolster demand, making utilities a defensive yet growth-oriented play in a volatile macro environment.

Manufacturing: Resilience in Specialized Sub-Sectors

While overall manufacturing output dipped 0.3% in June, select sub-sectors defied broader weakness, offering targeted investment avenues. The aerospace and defense segment rose 0.9%, while computer and electronic products gained 0.6%, driven by semiconductor demand and tech infrastructure spending. Even in struggling areas like motor vehicles (-2.0%), signs of stabilization emerged, with capacity utilization improving from March's 63.3% to June's 68.9%.

Key opportunities lie in:
1. High-tech manufacturing: Companies like Boeing (BA) or Analog Devices (ADI) benefit from global tech spending and U.S. export tailwinds.
2. Primary metals: Gains in this sub-sector (+3.1% YTD) reflect infrastructure demand, with firms like Nucor (NUE) poised to capitalize on steel shortages.
3. Grid-related industrial equipment: Firms supporting renewable energy infrastructure (e.g., General Electric's renewable division) align with utilities' modernization needs.

Wells Fargo emphasizes that tariffs continue to pressure manufacturing growth, but sectors less exposed to trade wars—such as aerospace and semiconductor equipment—offer better risk-adjusted returns.

The Mining Sector's Decline: A Cautionary Tale

Mining output fell 0.6% in June, exacerbated by an 18.1% collapse in coal production, underscoring structural challenges in this sector. While oil and gas extraction showed resilience, the broader sector's capacity utilization (90.6%) remains elevated relative to historical averages, signaling overcapacity in coal and potential price pressures.

Investors should avoid pure-play coal companies and exercise caution with broader mining ETFs like VanEck Vectors Coal ETF (KOL). The Fed's data highlights that even as mining's utilization rate is high, its long-term sustainability is questionable amid energy transition policies and declining global coal demand.

Transition from Pessimism to Data-Driven Optimism

The June rebound reverses earlier survey-based concerns, such as the ISM Manufacturing Index's contractionary reading in May. The Federal Reserve's revised capacity utilization data (77.6% vs. May's 77.5%) now aligns with hard production numbers, signaling a potential re-rating for sectors previously undervalued due to pessimism.

Wells Fargo's analysis underscores that investors should pivot toward quality assets with defensive cash flows (e.g., utilities) and high-growth industrial sub-sectors (e.g., aerospace, semiconductors), while avoiding commodity-driven plays like coal. Their recommendation to overweight intermediate-term taxable bonds complements equity allocations to these sectors, balancing risk amid policy uncertainty.

Investment Strategy: Allocate Strategically, Avoid Mining Pitfalls

1. Utilities: Overweight exposure to grid modernization leaders (NEE, D) and renewable energy infrastructure.
2. Manufacturing: Target aerospace (BA), semiconductor equipment (ASML), and tech-driven industrial firms (GE's renewable division).
3. Avoid: Coal-focused miners and broad mining ETFs due to structural and regulatory headwinds.

The Fed's data and Wells Fargo's insights suggest that sector rotation into utilities and specialized manufacturing is justified, with the June rebound acting as a catalyst. While broader economic risks persist, investors can capitalize on these opportunities by focusing on resilience and long-term trends rather than short-term volatility.

The industrial recovery is uneven, but its trajectory is clear: utilities and select manufacturing sub-sectors are leading the charge. For investors, the path to outperformance lies in recognizing these divergences and avoiding sectors stuck in decline.