Industrial Sector Underperformance and Strategic Investment Opportunities

The U.S. industrial sector faces headwinds, with May's 0.2% decline in industrial production and capacity utilization dipping to 77.4%, 2.2 percentage points below its long-run average. These metrics underscore a slowing manufacturing cycle, exacerbated by inflation concerns and logistical bottlenecks. Yet, within this uneven landscape, opportunities emerge for investors willing to parse the data and bet on innovation-driven resilience. This analysis identifies sub-sectors and companies positioned to thrive amid macroeconomic uncertainty, while cautioning against laggards tied to inflation-sensitive inputs.

The Downturn: Underlying Trends and Risks

The May industrial production report reveals a sector in transition. While utilities and mining sectors edged upward, manufacturing—a pillar of industrial health—stumbled. Excluding motor vehicles (which surged 4.9% due to temporary inventory restocking), manufacturing output fell 0.3%, and non-durable goods grew only 0.5%. Year-over-year, durable goods sectors like motor vehicles (-2.0%) and wood products (-1.6%) lagged, signaling broader weakness in capital-intensive industries.

Capacity utilization data amplifies this narrative. Manufacturing utilization sat at 76.7%, 0.6% below its historical average, suggesting slack in production capacity. This “slack” is typically deflationary, easing pressure on prices—a mixed blessing. While it tempers near-term inflation risks, it also reflects subdued demand, leaving companies vulnerable to overcapacity and margin pressure.

Meanwhile, global shipping dynamics add another layer of complexity. Transpacific rates, after a May rebound to $2,462/FEU (up 3% month-on-month), face volatility tied to tariff fluctuations and geopolitical risks. Asia-Europe rates, however, have collapsed 50–55% since early 2025, with congestion in European ports worsening delays. For industrials reliant on transoceanic logistics, these trends amplify costs and supply chain risks.

Resilient Sub-Sectors: High-Tech Manufacturing and Logistics Software

Amid the downturn, two sub-sectors stand out for their ability to navigate macro headwinds: high-tech manufacturing and logistics software plays.

1. High-Tech Manufacturing: The Coretura Model

The June 2025 launch of Coretura AB, the joint venture between Volvo Group (VOLV) and Daimler Truck (DAI), exemplifies the shift toward digitization. This venture aims to standardize software-defined vehicle platforms, enabling over-the-air updates and fostering an ecosystem for third-party apps. By decoupling software from hardware cycles, Coretura reduces development costs and accelerates innovation—critical in an era of rapid tech adoption.

While still early, Coretura's platform could unlock recurring revenue streams (e.g., software subscriptions) and position its parents as leaders in intelligent transportation systems. Investors should monitor their progress in launching products by 2030 and the adoption rate of their open-ecosystem model.

2. Logistics Software: Mitigating Shipping Volatility

Companies like Jabil (JBL), which are expanding U.S. manufacturing footprints while digitizing supply chains, offer a compelling hybrid play. Jabil's focus on nearshoring and advanced automation aligns with reshoring trends, reducing reliance on volatile transpacific routes.

Logistics software firms (e.g., Descartes Systems (DSCT), which provides real-time supply chain analytics) also benefit from the need to navigate congestion and rate spikes. Their solutions reduce operational friction, making them essential partners for industrials aiming to stabilize costs.

Avoiding Inflation Laggards

Not all industrials are created equal. Companies with high fixed costs, exposure to shipping volatility, or reliance on commodity-heavy inputs face downside risks. For instance:
- Steel manufacturers: Weaker demand for construction materials and rising energy costs (steel production is energy-intensive) pressure margins.
- Traditional auto parts suppliers: Outdated supply chains and lack of software innovation leave them vulnerable to Coretura-style disruptors.
- Export-dependent industrials: Firms reliant on transpacific shipping face margin erosion as rates fluctuate—seen in May's GRI hikes and potential $8,000/FEU peaks.

Investment Strategy: Tactical Shifts for Recovery

The industrial sector's recovery hinges on companies that blend digital innovation with operational agility. Here's how to position a portfolio:

1. Double Down on Coretura Partners:

2. Volvo Group (VOLV) and Daimler Truck (DAI) are bets on software-driven transformation. Their joint venture's success could redefine commercial vehicle economics, though execution risk remains.

3. Favor U.S. Manufacturing Expansions:

4. Jabil (JBL) exemplifies reshoring and automation. Its nearshored facilities reduce logistics risks while capitalizing on tax incentives.

5. Add Logistics Software Exposure:

6. Descartes Systems (DSCT) and Freightos (FRTS) offer tools to mitigate supply chain bottlenecks. Their recurring revenue models offer defensive characteristics.

7. Avoid Commodity-Exposed Names:

8. Steer clear of industrials with high input cost exposure (e.g., steel, cement) unless they demonstrate hedging strategies or margin resilience.

Conclusion: Innovation as the New Safety Net

The industrial sector's underperformance masks a critical truth: digitization is the new safety net. Companies like Coretura's parents and Jabil are redefining resilience through software, automation, and localized supply chains. While macro risks persist—slack capacity, shipping volatility—their agility positions them to outperform peers when recovery begins. Investors should focus on these innovation leaders while avoiding laggards tethered to outdated models.

The path forward is clear: prioritize firms that turn data into action and adapt to the post-pandemic industrial reality. The next cyclical upturn will belong to the digitized.

Disclosure: The author holds no positions in the mentioned stocks. Analysis is for informational purposes only.