By Bob Tita and Doug Cameron 

Manufacturers are booking more orders and delivering higher profits in a strong U.S. economy.

But investors are worried that the good times won't last: Costs are rising at some of the biggest industrial companies due to tariffs and a super-tight labor market.

Upcoming earnings will indicate how much of a dent those pressures are making on the bottom line. This week, 3M Co., Harley-Davidson Inc. and Whirlpool Corp. are scheduled to report.

Industrial stocks are down around 2% this year versus a 4.8% rise in the S&P 500. Some of the biggest manufacturers are leading the decline. Shares in Caterpillar Inc. have dropped 13% this year, while 3M is down 14%.

Shares in small- and medium-size companies have fared better than those of manufacturing heavyweights, but that has done little to reassure money managers. Assets in industrial exchange-traded funds have declined 8% in the last month alone as investors moved money into consumer staples and utilities.

"We're tracking towards the worst relative year for industrials in 20 years," said Scott Davis, chief executive at Melius Research LLC.

Shares have recovered slightly over the past week as initial earnings reports beat analysts' expectations. Fastenal Co. and W.W. Grainger Inc., which supply factories with everything from bolts to cleaning supplies, both signaled strong demand. Honeywell International Inc. on Friday reported higher sales and profit margins at all four of its divisions and said the trend is continuing in the third quarter.

But that good news has done little to offset investors' preoccupation with the effects of the Trump administration's import tariffs on manufacturers. Shares in aluminum producer Alcoa Corp. have fallen nearly 16% since Wednesday, when the Pittsburgh-based company said the 10% tariff on aluminum was driving up costs of the metal it imports to the U.S. from its smelters in Canada.

Investors' dissatisfaction stands in contrast to bulging order books and rising industrial output, buoyed by a rebound in oil prices that has spurred more domestic drilling. U.S. aerospace and auto manufacturers have also reported strong orders.

But near-record-low unemployment of about 4% is driving up wage bills and leaving some companies short of workers, holding back production. The labor market is particularly tight for experienced workers in cities such as Charlotte, N.C., and Houston, where steel mills are expanding production of pipe and tubing used in oil and natural-gas wells. Tariffs on imported pipe are helping to boost drilling companies' demand for those products made in the U.S.

"To make those products, they have to hire more people," said Kirk Murray, vice president of SeAH Steel America Inc. "From experience, I can say it's not easy." SeAH is expanding a tubing mill in Houston that had been dormant before the South Korean steelmaker bought it in 2016.

Other companies are scrounging for everything from low-skilled line workers to software engineers that can operate robots. The worker shortage threatens an upturn that is in its sixth month, measured by industrial output. Previous cycles have typically lasted about four years.

Manufacturing unemployment is at its lowest level in 15 years, according to the Labor Department. Companies surveyed for the closely watched Chicago Business Barometer said production fell in June from a year earlier, the fourth monthly drop since December. More than a third of companies said they had boosted salaries.

The heavy-truck market highlights the gap between strong growth signals and investor anxiety. North American orders are at a nearly 20-year high, but production hasn't kept pace, in part because of labor shortages, supply-chain disruptions and some concern that orders could be canceled.

Shares in Paccar Inc., the maker of Kenworth and Peterbilt trucks, are down nearly 12% this year.

Orders for heavy-duty trucks have surged since last fall to an annualized rate of about 430,000 vehicles. But manufacturers have been building trucks at a much slower rate. After particularly low production volume this spring, market forecaster ACT Research reduced its projection for this year to 316,000 vehicles from 328,000.

ACT President Kenny Vieth estimates that some 10,000 trucks were sidelined at assembly plants in April waiting for windshields, wire harnesses and other components. He said suppliers have been constrained by low inventories of parts from overseas and difficulty hiring workers.

Beyond the truck industry, demand signals and leading indicators such as new orders remain positive. That is calming concerns that the first months of 2018 may have been a high-water mark for construction and mining machinery, a possibility mooted by Caterpillar executives in April.

Caterpillar later said it had been misinterpreted, and expects the momentum to continue. The equipment maker reports second-quarter results on July 31.

Write to Bob Tita at robert.tita@wsj.com and Doug Cameron at doug.cameron@wsj.com

(END) Dow Jones Newswires

July 22, 2018 07:14 ET (11:14 GMT)