August Data Heighten Pressure on Industrial Stocks--Update

One of the hardest-hit areas of the stock market in recent months is under fresh pressure after a series of reports showed the manufacturing sector in decline.

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

Economic data released Thursday added to the group's woes. One key gauge of manufacturing activity, IHS Markit's flash manufacturing purchasing managers index, clocked in at 49.9 for August. That was the lowest reading since 2009 and an indication that manufacturing activity, which is defined as expanding when readings are above 50, contracted for the first time in years.

Data from the Federal Reserve Bank of Kansas City also disappointed, with the bank's manufacturing production index declining further to -2 from -6 in July.

Those reports gave investors additional reasons to shy away from the industrial sector.

The group has fallen 3.9% in August through Wednesday, more than the broader S&P 500's 1.9% decline. Caterpillar (CAT) 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 through Wednesday, 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


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  08-22-19 1324ET
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