Navigating Sector Rotation: Industrial Slowdowns and the Rise of Consumer Finance in 2025

The U.S. industrial sector is at a crossroads. The latest Federal Reserve data reveals a 0.1% decline in total industrial production for July 2025, marking a soft but significant slowdown in manufacturing and mining. While the broader index remains 1.4% above its year-ago level, the underlying trends—such as a 0.3% drop in primary metals and machinery output, and a 0.4% contraction in nondurable goods—signal structural fragility. Meanwhile, consumer finance ETFs like the iShares U.S. Home Construction ETF (ITB) have surged 57.13% year-to-date, outpacing industrial benchmarks. This divergence underscores a critical shift in economic momentum, offering investors a roadmap for tactical reallocation.

The Industrial Sector: A Tale of Mixed Signals

The July 2025 industrial production report highlights a sector grappling with conflicting forces. Manufacturing output, though unchanged on the month, saw durable goods rise by 0.3%—driven by aerospace and electrical equipment—while nondurables fell by 0.4%. Mining output declined 0.4%, and utilities dropped 0.2%, reflecting weak energy demand. Capacity utilization for manufacturing (76.8%) and utilities (70.0%) remains below long-term averages, suggesting underutilized resources and muted inflationary pressure.

These metrics align with broader macroeconomic trends. Tariff-driven cost inflation, particularly on steel and aluminum, has eroded margins for industrial conglomerates like Ford and General Motors, which reported $2B and $3.5B in tariff-related losses, respectively. The Industrial Select Sector SPDR Fund (XLI), a proxy for the sector, has underperformed the S&P 500, with a 12-month return of -1.85% as of June 2025. Investors in industrial ETFs face a dual challenge: near-term cost pressures and long-term structural shifts in global trade dynamics.

Consumer Finance: A Bright Spot Amid Uncertainty

In contrast, consumer finance has thrived. The iShares U.S. Home Construction ETF (ITB) and SPDR S&P Homebuilders ETF (XHB) have capitalized on resilient housing demand and improved credit quality. ITB's 57.13% annualized return in 2025 reflects robust performance in homebuilding and construction, while XHB's 3-year return of 22.72% highlights its diversified exposure to home improvement and building products.

The sector's strength stems from two pillars:
1. Consumer Resilience: Higher-income households have maintained spending power, supported by wage growth and low delinquency rates.
2. Interest Rate Tailwinds: Banks and lenders benefit from wider net interest margins, as the Federal Reserve's 2025 rate hikes boost returns on loans and insurance products.

Financial institutions like Ally Financial (ALLY) and JPMorgan Chase (JPM) have reported stronger loan portfolios, with subprime and near-prime credit quality improving across the FICO spectrum. This has translated into outperformance for consumer finance ETFs, which now offer a compelling alternative to industrial assets.

Strategic Implications for Investors

The data paints a clear picture: industrial conglomerates are vulnerable to trade policy shocks and capacity constraints, while consumer finance firms are insulated by domestic demand and favorable monetary conditions. For investors, this signals a strategic pivot toward sectors with stronger cash flow visibility and lower macroeconomic sensitivity.

Actionable Steps:
1. Reduce Exposure to Industrial ETFs: Consider trimming positions in XLI or sector-specific funds like the U.S. Global Jets ETF (JETS), which face headwinds from tariff-driven margin compression.
2. Increase Allocation to Consumer Finance: ITB and XHB offer differentiated access to a sector poised to benefit from housing market tailwinds and credit cycle strength.
3. Balance with Defensive Plays: Pair consumer finance gains with utilities or consumer staples for portfolio stability, as industrial volatility persists.

Conclusion: Riding the Momentum Shift

The U.S. industrial sector's slowdown is not a collapse but a recalibration. However, the relative strength of consumer finance highlights a new economic paradigm: one where domestic consumption and credit quality drive growth, rather than export-led manufacturing. Investors who recognize this shift early can position their portfolios to capitalize on the next phase of market rotation. As the Fed's annual revision of industrial production data in Q4 2025 unfolds, staying attuned to sector-specific fundamentals will be key to navigating the evolving landscape.