Non-defense capital goods excluding aircraft revised higher
Non-defense capital goods excluding aircraft, or core capital goods, are the goods that exclude aircraft and defense purchases. The United States Census Bureau releases this data monthly. They’re also known as core capital goods orders. The data track new orders for machinery, tools, and equipment by industry. These investments require a capital outlay and are only placed if there is an expected increase in demand.
Apart from core capital goods orders, all new orders, shipped goods, and inventories are termed durable goods. Capex (capital expenditure) investments by industry is a strong economic indicator and thus used by the Conference Board when constructing its Leading Economic Index (or LEI). The total weight for non-defense capital goods in the LEI is 4.0%.
Recent economic data
According to the October Conference Board LEI, core capital goods orders for September were valued at $37.9 billion compared to a revised reading of $38.0 billion in August. Although the upward revision in the August reading is a positive sign, the fall in September had a negative impact on the LEI this month.
An increase in core capital goods (VIS) orders is considered a positive signal for the economy. Companies make these types of investments only when they expect a large increase in demand.
Market impact of core durable goods orders
An increase in core durable goods orders is considered a positive signal for the industrial sector (IYJ). Companies in the shipping (SEA) and capital goods (DXJC) industries stand to benefit from a continued increase in core durable goods orders. The minor fall in order value in September may not be a reason to worry. With the proposed changes to the expensing mechanism of capital goods, the index could see strong growth going forward.
Companies in the industrial sector (IYJ), including shipping (SEA) and durable goods (FXR), stand to benefit once tax reforms are implemented. The performances of these industries have a major impact on indexes such as the S&P 500 (SPY) and the Dow Jones Industrial Average 30 (DIA).
In the next part of this series, let’s see how the housing sector dragged down the Conference Board LEI in October.