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Long Story Short: Understanding How Industrial Companies’ Growth is Affected by Cyclical Economic Periods
Cyclical Economic Shifts: Industrial Companies Could Feel the Effects
The Industrial sector provides numerous products and services that support many industries and companies. Industrial companies manufacture construction machinery and equipment, aircraft, and provide commercial and transportation services. Investing in industrial companies allows for diversified portfolios and long-term growth with a multi-trillion-dollar market cap. Many industrial companies are cyclical, so they are affected by economic shifts.
Insulated: Certain industrial companies have inherent insulation against cyclical economic downturns and not all are affected by high fixed costs. Companies with defense contracts are dependent on large government agencies that provide consistent business and are unlikely to be affected by downturn economic shifts. Governments are unlikely to fail to offer industrial companies a unique advantage during recessions. Many industrial companies will maintain balance sheets with sufficient cash flows, allowing for potential gains during periods of rebuild and new investment offsetting lower production.
Long Term: Industrial companies can offer solid long-term growth potential to investors even though they do not necessarily have rapid growth. Industrials can pay out high dividends during profitable periods of the business cycle and their respective stocks maintain long term appeal during these phases. Many industrial companies can provide for governmental agencies and businesses, meeting demand and rebuilding phases for low equipment inventories during periods of cyclical economic downturn. Due to the variety in the industrial sector, plenty of innovation and production of new concepts exists in the aerospace and chemical company spaces.
Trade Tensions: The U.S.-China trade war tensions have recently dampened global manufacturing, increasing global sector struggles and decreasing investor profitability. Potential tariffs between major economic players lead to global industrial sector pressure and a downturn in manufacturing. Downturns in global economic growth and markets also lead to industrial sector deterioration. Declines in global industrial markets in the U.S. and China increase concerns over the possibility of sector contractions. Investors maintain criticism over U.S. infrastructure agreements and funding for industrial companies, with markets having little reaction. The Federal Reserve raising rate hikes in fear of economic recession and higher inflation has also dented the industrial markets. Shifts in economic policies can potentially be harmful to industrial companies’ suppliers and clientele.
Cyclical: Many industrial sector companies have high fixed costs and are large production manufacturers which need to maintain equipment, skilled workers, and contracts. Industrial companies need to maintain steady income and sales as costs are high, and so is a potential failure. The industrial sector varies widely, offering construction equipment, chemical products, railroads, and defense contracts to governments and businesses. These companies tend to be cyclical and may lose profitability during an economic downturn. Industrial companies that provide services may not necessarily have higher fixed costs but still will see a decline in business due to client relations in a state of economic difficulty.
The industrial sector widely varies, offering products and services such as manufacturing, construction equipment, and fulfilling defense contracts. Industrial companies have the prospect of potential long-term growth, maintaining strong client and supplier relations. Industrial companies that are well managed still face cycles of economic downturn. These cyclical periods are the largest factor affecting the industrial sector and can cause significant pressure.
https://www.schwab.com/resource-center/insights/content/industrial-sector, Brad Sorensen, AUGUST 29, 2019
https://www.fool.com/investing/general/2014/08/20/industrials-investing-essentials.aspx, John Rosevear, Aug 20, 2014