United States / Spotlight Reports
Mega-trends Analyzed at the Sector Level
by Marisa Lifshutz Analyst Robert Miles Analyst
Oct 16 2018

IBISWorld’s sector reports provide a top-level perspective on how NAICS sectors perform, while also demonstrating how diverse sets of industries aggregate. Although each sector is unique, when their constitutive industries are aggregated, commonalities become evident. Each industry is exposed to performance drivers that are out of the operators’ hands. When these industries are compiled into sectors, then so are these drivers. As a result, common factors connect sectors to each other. Yet, not all factors are quantifiable. Certain operating metrics, like technology change, help explain the connections and relationships of sector trends but are best described qualitatively.

Broad Trends Affecting Sector Performance

The economy has been performing strongly in recent quarters, US gross domestic product increased at an annualized 4.2% rate in the second quarter – the largest growth rate since the third quarter of 2014. Unemployment has been low and wages have exhibited positive upward movement. With a strong labor market, there has been commensurately strong consumer spending. This has been a key factor aiding GDP growth. Moreover, as commodity prices have rebounded and companies have responded to regulatory changes, private fixed investment has been strong.

While the headline figures present an interesting story about the economy, broad trends leave out much of the details. The Agriculture, Mining and Manufacturing sectors all experienced difficulty over the past five years. Yet, these sectors are all expected to experience a reversal of fortunes in 2018. The upswing in fixed investment was instrumental to the performance of these sectors as price movements and investment from other sectors flow to these three sectors.

Sectors rise together

For agriculture, mining and manufacturing, falling commodity prices weighed on revenue from late 2014 to 2017. However, demand continued to grow, which resulted in an acceleration of revenue as prices moved upward. Commodity supply gluts, driven by more efficient production, directly affected agriculture and mining. These lower prices filtered into manufacturing, which is downstream, and resulted in reduced selling prices for manufactured goods. Broader trends like increasing globalization and new production techniques increase competition for manufacturers which tends to squeeze manufacturers pricing power.

When analyzed with more granularity, the linkages between these sectors becomes even more apparent. For example, the world price of crude oil is a key performance driver for Mining and Manufacturing. This makes sense for the Mining sector, as it directly affects the price received for extracting oil. Moreover, oil prices, coal prices, and natural gas prices are typically correlated. When breaking down the Manufacturing sector, the top five industries by revenue are Petroleum Refining; Aircraft, Engine & Parts Manufacturing; Meat, Beef & Poultry Processing; SUV & Light Truck Manufacturing; Brand Name Pharmaceutical Manufacturing. Petroleum Refining is a $501.4 billion industry and is directly affected by oil prices. While agriculture is not directly driven by the price of oil, commodity price correlations did have an effect on agriculture. With the legislative focus on increased biofuel use, like the Energy Independence and Security Act of 2007, agricultural performance and oil performance were linked.

When analyzing performance at the industry level, it becomes apparent that there are common threads driving trends. This arises meaningfully when dissecting how unique industries aggregate into a broader sector definition. For certain trends, like commodity prices, the common threads can be quantified as in the case of agriculture, mining, and manufacturing. Technology change is something that is difficult to quantify but leaves an indelible mark on the evolution of industry performance. Not only does technology change effect how industries operate, but it also helps redefine what industries make and create new inter-industry connections. Inventory control systems, storage analytics, energy efficiency, and online trends have altered whole sectors. While all sectors are exposed to the same technology trends, the same trends have varied effects. What occurs is a trickling of innovations throughout the supply chain as developments occur and drive technology change in linked industries.

Automated inventory control

Technology plays an important role in the Wholesale Trade and Retail Trade sectors, as technological improvements enable operators to reduce labor costs and improve operational efficiencies. While these sectors continue to require a large degree of human labor input, retail and wholesale operations have both been transformed by improvements in supply chain management. These include automated inventory control systems, which are able to record inventories, select products and determine minimum order quantities, as well as the adoption of point-of-sale systems, which maintain an online record of all transactions and enable management to track the performance of products. Additionally, radio frequency identification tags, which store product information and provide real-time information on inventory, enable operators across the supply chain to keep better track of inventory and monitor products to reduce inventory shrinkage.

Storage and analytics

Technological improvements have changed the way that companies store and analyze data within the Finance and Insurance, Information, Healthcare and Social Assistance and Professional, Technical and Scientific Services sectors. Operators within these sectors must store and safeguard a large volume of consumer information and increased computing power has enabled sector companies to transform data storage operations. For example, many of the transactions and agreements within the Finance and Insurance sector are now completed electronically and stored on cloud-based services, improving a previously highly labor-intensive process that required paper documentation. Furthermore, financial institutions have benefited from technological advancements that have enabled better data collection and analytics tools. Meanwhile, within the Healthcare and Social Assistance sector, operators have transformed patient record keeping operations through electronic health records systems. These sector-wide investments in electronic patient records have aided in reducing costs and improving efficiencies for operators.

Operators in the Professional, Technical and Scientific Services sector have similarly benefited from improved data storage and analytics capabilities.  The trend toward cloud computing, a model in which computer applications are hosted and managed by third-party companies, has benefited sector operators that have used their expertise in infrastructure solutions to secure projects developing cloud-computing systems. In response to these rapid shifts in technological trends, many of the largest companies within the sector have increasingly switched their focuses toward offering third-platform solutions, such as cloud-based computing and data analytics. Within the Information sector, the rise of cloud storage has similarly presented new opportunities for industry operators. Data processing and storage has grown substantially as a share of revenue for operators within the sector as businesses across the economy have outsourced their data storage.

Energy efficiency

Within the Manufacturing sector, technological improvements have enabled sector operators to meet more stringent environmental regulations. For example, many industries related to automobile production must comply with Corporate Average Fuel Economy standards, which focus on increasing fuel efficiency. These standards have led to the implementation of new technologies by automobile manufacturers to ensure fuel-efficiency and safety while managing costs. Furthermore, automobile manufacturers have increasingly bolstered investment in green technologies to integrate these technologies into product lines. Manufacturers of trucks, cars, ships and aircraft are all taking advantage of electronic and software technology and better materials to produce vehicles that use far less fuel than older models.

Similarly, technological improvements within the Transportation and Warehousing sector have been partially driven by investments in fuel-efficient technology. As the sector is considered one of the largest emitters of greenhouse gasses, operators within the sector have increased investments in more fuel-efficient vehicles to reduce the environmental impact of sector operations. Furthermore, with the cost of electric vehicles declining in line with battery costs, the use of electronic vehicles within the sector has heightened. As fuel is one of the largest costs for sector operators, investments in electronic vehicles have also been supported by cost-savings strategies. Meanwhile, for operators in the Utilities sector, innovations in fuel technology have increased the economic viability of smaller-scale electricity generation. Other key technology improvements have related to pollution control and end-user energy-efficiency.

Online and mobile accessibility

Consumer-facing sectors have largely increased investments in e-commerce tools for customers, developing online and mobile technologies to make their products and services more accessible. For example, operators within the Educational Services have increased expenditure on computer equipment, software and related technologies to create virtual classrooms, which can reach a larger number of students across school districts and beyond state and country borders relative to traditional classrooms. Additionally, providing online courses enables sector operators to tap into a relatively under-served market, which includes low-income individuals and those in the workforce. Furthermore, investing in online classrooms enables operators to cut down on costs associated with having a physical location or campus.

Furthermore, operators across the Accommodation and Food Services sector have increased investments in internet-based booking and other web technologies to provide a more seamless customer experience. The increased use of mobile and web-based technologies has helped companies within this sector increase operational efficiency by providing customers with simple and direct methods of interacting directly with an operator. These technologies are primarily used in industries within this sector that have access to economies of scale and a national consumer base, whereas other industries within this sector rely heavily on labor to provide services and have limited opportunity for technological growth.