Capacity Utilization Divergence: A Strategic Shift from Automobiles to Metals and Mining

The U.S. Capacity Utilization report for September 2025 delivered a stark warning: the overall rate held at 75.9%, 3.6 percentage points below its long-term average (1972–2024). This underperformance, however, masks a critical divergence between sectors. While the automobile industry's production plummeted by 2.9%, the mining sector maintained a robust 85.4% utilization rate—0.2 points above its historical norm. This divergence underscores a compelling case for sector rotation, urging investors to underweight automobiles and overweight metals and mining.

The Automobile Sector: A Tale of Structural Weakness

The automobile industry, a bellwether of consumer demand, has long operated near its long-run average of 87.6% capacity utilization. Yet, in September 2025, its utilization rate stood at 75.6%, 1.7 points below its historical benchmark. This underperformance is not an anomaly but a symptom of systemic challenges: semiconductor shortages, 25% steel tariffs, and soft consumer demand have eroded margins and constrained output. Historically, the sector has rebounded after negative surprises, but these rebounds are increasingly short-lived in a high-rate environment.

A historical backtest of sector rotation strategies reveals that when manufacturing data surprises are negative, the automotive sector typically rebounds by +2.1% in the following month. However, this recovery is often fleeting, as rising interest rates and global supply chain bottlenecks persist. For instance, in July 2025, the automobile production index fell 0.2% MoM, while steel utilization (a proxy for construction demand) hit 77.5%. This contrast highlights the sector's vulnerability to macroeconomic headwinds.

Metals and Mining: Resilience Amidst Economic Headwinds

In stark contrast, the metals and mining sector has demonstrated remarkable resilience. The mining industry's capacity utilization rate of 85.4% in September 2025—4.1 points above its long-run average—reflects sustained demand for raw materials driven by infrastructure spending and defense projects. The primary metals industry, though cyclical, has shown less volatility than automobiles, with utilization rates stabilizing near 71.3% in September.

Historical data further supports this divergence. When steel utilization exceeds 75%, construction and engineering sectors outperform automobiles by an average of +4.2% in the subsequent month. This dynamic is amplified by the mining sector's proximity to commodity prices and regulatory tailwinds. For example, the mining sector's 2.9% annualized growth in Q3 2025, despite flat MoM output, signals underlying strength in demand for base metals.

Strategic Implications for Investors

The capacity utilization divergence between these sectors presents a clear tactical opportunity. Investors should consider:
1. Underweighting Automobiles: Given the sector's reliance on consumer demand and susceptibility to supply chain disruptions, reducing exposure to automotive ETFs (e.g., IYF) is prudent. Historical backtests show that underweighting automobiles during periods of weak capacity utilization has historically outperformed holding the sector.
2. Overweighting Metals and Mining: The mining sector's ability to operate near capacity despite broader economic slowdowns makes it a compelling overweight candidate. ETFs like XTL or individual plays in steel and copper producers could benefit from sustained infrastructure spending and inflation-linked commodity prices.
3. Monitoring Steel Utilization: Steel utilization rates above 75% have historically signaled robust construction activity, making them a leading indicator for metals sector performance. Investors should track this metric closely for rotation cues.

Conclusion

The September 2025 Capacity Utilization report is a clarion call for sector rotation. While the automobile industry grapples with structural underperformance, the metals and mining sector thrives on resilient demand and favorable policy tailwinds. By underweighting automobiles and overweighting metals/mining, investors can position portfolios to capitalize on divergent sector dynamics. As always, vigilance in monitoring leading indicators—such as steel utilization and commodity prices—will be key to navigating this evolving landscape.