A strong U.S. dollar and the decline in capital expenditure due to low oil prices could pressure the industrial sector and related exchange traded funds ahead.
Year-to-date, the Industrial Select Sector SPDR (NYSEArca: XLI) was up 0.3%, Vanguard Industrials ETF (NYSEArca: VIS) was 1.7% higher and iShares U.S. Industrials ETF (NYSEArca: IYJ) gained 3.0%.
U.S. industrial output fell in March, posting its first quarterly decline since the end of the recession, reports Eric Morath for the Wall Street Journal.
Industrial production, which includes manufacturers, utilities and mines, diminished a seasonally adjusted 0.6% from the prior month and declined at an annual rate of 1% over the first quarter, the first quarterly decrease since the second quarter of 2009, according to the Federal Reserve.
The decline in industrial production last quarter “resulted from a drop in oil and gas well drilling and servicing,” the Fed said. “And from a decrease in manufacturing production of 1.2%.”
The energy industry has been frantically cutting back spending and reducing costs in response to the plunge in oil prices. [Industrial ETFs Could Also Slip On Oil]
According to the Federal Reserve, manufacturing output rose 0.1% over March, its first increase in fourth months, after falling 0.2% in February, Bloomberg reports.
U.S. manufacturing, which makes up 12% of the economy, could remain weak on the lingering effects of the dollar and fuel costs. The strong dollar makes American-made goods more expensive to foreign buyers.
“The dollar is a wet blanket on manufacturing,” Guy Berger, a U.S. economist at RBS Securities Inc., said in the Bloomberg article. “If the dollar remains this strong, we’re going to have headwinds for manufacturing for a while.”
General Electric (NYSE: GE), a major player in the industrial sector and major component in related ETFs, has also recently stated its plans to divest its banking operation and focus on the industrial space, notably its jet-engine business, reports Ted Mann for the Wall Street Journal. GE makes up 10.3% of XLI, 9.8% of VIS and 10.3% of IYJ.
Industrial Select Sector SPDR
For more information on the industrial sector, visit our industrials category.
Max Chen contributed to this article.