Strategic Shifts in U.S. Industrial Production: Navigating Electrical Equipment and Mortgage REITs in a Post-Soft-Landing Era

The U.S. industrial production landscape in July 2025 paints a mixed picture: a 0.1% decline in total output, with manufacturing flat, mining down 0.4%, and utilities falling 0.2%. Yet, within this stagnation, sector-specific dynamics reveal opportunities for investors. The Electrical Equipment sector, for instance, bucked the trend with gains in aerospace and furniture production, while Mortgage REITs (mREITs) face a delicate balancing act in a post-soft-landing environment. This article dissects how industrial trends shape capital goods and real estate exposure, offering a roadmap for strategic allocation.

Industrial Weakness and Sector Resilience: The Electrical Equipment Case

The Federal Reserve's July 2025 data highlights a critical divergence: while overall industrial output contracted, durable goods manufacturing rose 0.3%, driven by electrical equipment, aerospace, and furniture. This resilience stems from two structural tailwinds: electrification and digital transformation.

The shift toward clean energy and electric vehicles (EVs) has created a surge in demand for electrical components, from battery systems to smart grid infrastructure. Deloitte's 2025 Manufacturing Industry Outlook notes that over $31 billion in clean technology manufacturing investments were announced in 2024 alone, with electrical equipment at the forefront. For example, the production of electric and hydrogen-powered equipment is accelerating to meet decarbonization goals, supported by both regulatory mandates and consumer demand.

Moreover, the sector's integration with AI and automation is a key differentiator. Manufacturers are leveraging generative AI to optimize product design and supply chains, reducing costs and improving margins. This technological edge positions Electrical Equipment firms to outperform even in weak industrial environments, as long as capital flows into electrification and digital infrastructure.

Mortgage REITs: Navigating Interest Rates in a Post-Soft-Landing Scenario

While Electrical Equipment thrives on industrial tailwinds, mREITs operate in a more volatile arena. These entities, which fund long-term mortgages with short-term debt, are acutely sensitive to interest rate movements. The Federal Reserve's recent pivot toward a “soft landing”—raising rates to curb inflation without triggering a recession—has created a fragile equilibrium.

Historical data from 1992–2024 shows that mREITs outperform private real estate in higher-rate environments, with average annual total return spreads widening as rates rise. However, this resilience comes with caveats. In a post-soft-landing scenario, where rates stabilize at elevated levels, mREITs must manage net interest margin (NIM) compression. For instance, if borrowing costs rise faster than mortgage yields, profitability could erode.

Yet, a soft landing also offers upside. With inflation under control and consumer spending resilient (evidenced by July's strong retail sales), mREITs could benefit from a steady stream of mortgage-backed income. Their access to cost-advantaged capital—via equity, debt, and joint ventures—provides a buffer against margin pressures. The key is portfolio diversification: mREITs with a focus on residential mortgages (which are less sensitive to industrial cycles) may outperform those tied to commercial real estate.

Strategic Allocation: Balancing Capital Goods and Real Estate Exposure

The interplay between industrial production and interest rates demands a nuanced approach. Here's how investors can position portfolios:

1. Electrical Equipment as a Cyclical Play:
2. Why: The sector's link to electrification and digital infrastructure ensures demand even during industrial slowdowns.
3. How: Prioritize firms with exposure to clean energy (e.g., EV charging networks, solar inverters) and AI-driven manufacturing.

4. Risk: Input costs for raw materials (e.g., copper, rare earth metals) remain elevated, but supply chain improvements are mitigating this.

5. Mortgage REITs as a Defensive Counterbalance:

6. Why: In a post-soft-landing environment, mREITs offer income stability and potential capital appreciation.
7. How: Favor mREITs with high-quality residential mortgage portfolios and strong balance sheets. Avoid those overexposed to commercial real estate, which could face headwinds from weak industrial demand.

8. Risk: Rate volatility could compress margins, but disciplined capital management can offset this.

9. Sector Rotation Based on Industrial Trends:

10. When industrial production weakens (as in July 2025), tilt toward Electrical Equipment to capitalize on structural growth.
11. When industrial activity stabilizes and rates normalize, increase mREIT exposure to capture income and diversification benefits.

Conclusion: A Dual-Track Strategy for Uncertain Times

The U.S. industrial sector's current duality—weak aggregate output but resilient subsectors—demands a dual-track investment approach. Electrical Equipment firms are poised to benefit from electrification and digital transformation, while mREITs can thrive in a post-soft-landing environment if they manage interest rate risk effectively. By strategically balancing capital goods and real estate exposure, investors can navigate the complexities of a slowing industrial cycle and position for long-term growth.

In the end, the key lies in aligning sector allocations with macroeconomic signals. As the Federal Reserve's next moves and industrial trends unfold, agility will be the hallmark of successful portfolios.