CMI Cummins Inc

By Akane Otani 

One of the hardest-hit areas of the stock market in recent months faces a fresh test Thursday when a series of reports on the manufacturing industry are released.

Industrial stocks, ranging from heavy-machinery manufacturers like Caterpillar Inc. to engine maker Cummins Inc., have lagged behind the S&P 500, as investors have grown increasingly worried about the health of the sector.

Economists surveyed by The Wall Street Journal expect one key gauge of manufacturing activity, IHS Markit's flash manufacturing purchasing managers index, to clock in at 50.3 for August. That would mean manufacturing activity barely escaped falling into contraction territory, defined as a reading below 50. Investors will also get a look at the Federal Reserve Bank of Kansas City's manufacturing survey later Thursday.

Both reports could give investors further reason to shy away from the industrial sector.

The group has fallen 3.9% in August, more than the broader S&P 500's 1.9% decline. Caterpillar has lost 11%, while farm machinery maker Deere & Co. has fallen 6.5%, and power and hand tool maker Stanley Black & Decker Inc. has dropped 6.2%.

Shares of transportation companies that help move raw goods and materials around the country have also taken a hit. The Dow Jones Transportation Average, which tracks truckers, railroads and airlines, is down 5.6% for the month, on track for its biggest monthly decline since May.

The slide in industrial stocks matters to investors because many have been trying to gauge whether increasingly disappointing manufacturing data are foreshadowing a broader pattern of economic decline or just showing isolated weakness for now.

Activity in the services sector has remained strong for the most part. That is a reassuring sign for investors who note that manufacturing activity, while important, accounts for a relatively small portion of overall economic growth.

The bad news: Downturns in the manufacturing sector have typically preceded weakening in the services sector over the past 25 years, according to Simon MacAdam, global economist at Capital Economics.

The caveat? "The extent of the slowdown has varied a lot and has depended on broader economic conditions than simply the health of the manufacturing sector," Mr. MacAdam said in a research note.

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Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

August 22, 2019 08:14 ET (12:14 GMT)

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