Recession Signals in U.S. Industrial Production: What Investors Should Watch Now

The U.S. industrial sector, a barometer of economic health, is showing early warning signs of strain. As of July 2025, total industrial production dipped 0.1%, while capacity utilization across the industrial complex fell to 77.5%—2.1 percentage points below its long-run average. This decline, though modest, reflects a broader narrative of weakening demand and operational constraints. For investors, the breakdown by sector—particularly in mining, manufacturing, and utilities—offers critical clues about the economy's trajectory and the need for defensive positioning.

Mining: A Sector Tethered to Global Forces

Mining output fell 0.4% in July 2025, with capacity utilization at 90.3%, still 3.8 percentage points above its historical average. While this suggests the sector remains relatively robust, historical context reveals a vulnerability. During the 1990s and 1997–1998 Asian financial crisis, U.S. mining firms faced collapsing prices due to foreign competition and global demand shocks. Today, similar risks loom as China's industrial overcapacity and geopolitical tensions in energy-producing regions threaten to depress prices further.

Investors should monitor global commodity indices and trade tensions. A prolonged slump in mining could signal a broader slowdown in capital-intensive industries, prompting a shift away from cyclical materials stocks.

Manufacturing: Flat Output, Mixed Signals

Manufacturing output remained unchanged in July 2025 but was 1.4% above its 2024 level. Capacity utilization at 76.8%—1.4 percentage points below its long-run average—suggests underutilized capacity and weak demand. The sector's performance is split: durable goods (e.g., aerospace, electrical equipment) rose 0.3%, while nondurables (e.g., primary metals, machinery) fell. This duality mirrors the U.S. economy's structural shift toward services, reducing manufacturing's sensitivity to domestic cycles.

However, the decline in nondurable goods—a sector tied to everyday consumption—signals potential weakness in household spending. Historically, manufacturing downturns have preceded recessions, as seen in 2009. Investors should watch for further softening in durable goods orders and consider reducing exposure to cyclical manufacturing subsectors.

Utilities: A Red Flag in a Defensive Sector

The utilities sector's capacity utilization plummeted to 70.0% in July 2025, 14.2 percentage points below its long-run average. This is alarming, as utilities are typically a safe haven during downturns. The drop in electric utility production points to reduced industrial and residential demand, a harbinger of broader economic weakness.

Historically, utilities have outperformed during recessions due to their essential services. The current underperformance suggests a breakdown in consumer and business confidence. For investors, this is a clear signal to rotate into defensive sectors.

Sector Rotation Strategies for a Deteriorating Outlook

The data underscores the need for a strategic reallocation:
1. Defensive Sectors: Overweight utilities, consumer staples, and healthcare. These sectors provide stability amid uncertainty.
2. Avoid Cyclical Exposure: Reduce holdings in consumer discretionary, real estate, and industrials, which are vulnerable to demand shocks.
3. Energy and Materials Caution: While energy and materials historically benefit from commodity booms, global integration has muted their reliability. Focus on companies with strong balance sheets rather than speculative plays.

The Federal Reserve's planned revisions to industrial production data in Q4 2025 will refine these signals, but current trends justify a cautious stance.

Conclusion

Industrial capacity utilization is a leading indicator that transcends headline GDP figures. The current divergence between mining's global vulnerabilities, manufacturing's mixed performance, and utilities' sharp decline paints a picture of an economy teetering on the edge of a slowdown. For investors, the message is clear: prioritize defensive positioning, monitor sector-specific trends, and prepare for a potential reallocation of capital as the economic cycle evolves.