uploads/2018/05/6-15.jpg

Are New Tax Rules Helping Capex Spending by Industries?

By

Updated

Non-defense capital goods excluding aircrafts orders increased in April

The US Census Bureau publishes a monthly report that tracks new orders for machinery, tools, and equipment for US industries. This data is released by the US Census Bureau through the Manufacturer’s Shipments, Inventories, and Orders (or M3) survey. Capex spending by industry can be assessed through this economic indicator. Defense and aircraft orders (ITA) are excluded in this reading because of their aseasonality and large order size, which distort the survey readings.

Article continues below advertisement

The Conference Board Leading Economic Index (or LEI) uses capital goods orders as a constituent in its LEI economic model. Increased capital spending from industries (XLI) is a positive sign for the economy, as companies generally increase capex when they expect increased demand. The forward-looking trait of this indicator justifies its inclusion in the LEI and this indicator has a weight of 4% in the LEI.

April data improved from March

As per the latest Conference Board LEI report, the core capital goods orders for April were valued at $39.1 billion as compared to the downward revised March reading of $39.0 billion. Changes to the accounting practices related to capex and reduced tax outflow because of tax cuts helped in increasing the spending from industries (VIS). The manufacturers’ new orders and non-defense capital goods had a net negative impact of 0.02 (or 2%) on the leading economic index.

Market impact of core durable goods orders

Tax cuts came into effect in December 2017 and are likely to have a positive impact on the heavy and medium equipment manufacturers (IYJ) in the near term. With the expectations for companies to invest the additional savings from tax cuts remaining high, there could be further increased capital spending by industries (DXJC), a positive sign for the economy, and industries. In the next part of this series, we’ll analyze the negative impact of building permits in the April LEI reading.

Advertisement

More From Market Realist