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How the Recent Tax Cuts Could Affect Industries’ Investments

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Non-defense capital goods drop in November

Non-defense capital goods orders exclude aircraft and defense purchases. The US Census Bureau releases a monthly report that tracks new orders for machinery, tools, and equipment for US industries. Defense and aircraft (ITA) orders are excluded from this report because they are usually large and distort the monthly reading.

Capital goods orders form a constituent of the Conference Board LEI (Leading Economic Index). Higher investments by industries (XLI) in machinery are a positive sign, indicating that industries expect an increase in demand. This economic indicator has a weight of 4% in the LEI.

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Recent economic data and tax reform

According to November’s LEI, core capital goods orders were valued at $39.0 billion, whereas October’s upwardly revised reading was $39.1 billion. The trend has remained positive, and the recent announcement of tax reform could help increase core capital orders. With a lower tax rate, companies could have access to additional cash to invest in machinery. An increase in core capital goods (VIS) orders is considered a positive economic sign.

Core durable goods orders’ market effects

The industrial (IYJ) sector stands to benefit the most from increases in core capital goods orders. Tax cuts set for 2018 could help the industrial (DXJC) sector improve further, and the sector is likely to benefit from global economies’ recent recovery. In the next part of this series, we’ll analyze how the housing sector affected the LEI in November.

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