Definition of the capital goods sector

What is the capital goods sector?

The capital goods sector (also called “industrial sector”) is a category of inventories related to the manufacture or distribution of goods. The sector is diverse, with companies that manufacture machinery for the creation of capital goods, electrical equipment, aerospace and defense, engineering and construction projects.

Key takeaways

  • The capital or industrial goods sector is a group of companies that manufacture or distribute goods.
  • The group of companies includes companies from the aerospace and defense, construction and engineering sectors.
  • The strength of the sector is tied to the economy, with manufacturers thriving when the economy is good and struggling when it is bad.

Understanding the capital goods sector

Performance in the capital goods sector is sensitive to fluctuations in the business cycle. Because it relies heavily on manufacturing, the sector does well when the economy is booming or expanding. As economic conditions worsen, demand for capital goods falls, typically driving down the sector’s share prices.

How the capital goods sector is affected by other markets

The sales of inventory produced by machinery that comes from companies in the capital goods sector can have a reverberating effect on companies in this segment. For example, if federal budget restrictions reduce defense spending, the aerospace industry could see a decline in demand for its fighter jets. Producers of the machinery used to build those planes, in turn, would receive fewer orders.

Similarly, if demand for new cars declines, the auto industry may have to cut production and possibly discontinue underperforming product lines. The capital goods sector would see a decline as demand for factory equipment declines.

Boeing, General Electric, Honeywell International, Union Pacific Corp. and Lockheed Martin are some of the largest companies in the capital goods sector.

Special Considerations

Some aspects of the capital goods sector may face permanent changes rather than simply being affected by cascading market fluctuations. The introduction of a new type of product or device could mean an expansion for companies in the capital goods sector. The development of alternative energy concepts often requires the construction of new infrastructure. The expansion and diffusion of offshore wind farms to produce energy will increase the demand for wind turbines that are critical to the industry. That means that turbine manufacturers will need more factories to produce the parts for these huge machines.

Additionally, the materials needed to build the turbines will also see increased demand. These and other contributing factors could lead to increases in the capital goods sector as this market grows beyond a small niche.

Other forms of innovation will also bring lasting change to companies in the capital goods sector. Fully electric cars will require the construction of many more charging stations to allow these vehicles to operate on the scale of gasoline vehicles. It is necessary to produce the machinery used to create cargo equipment. Some charging stations are built with their own energy sources, such as solar panels or wind turbines. Increased demand for these components may translate into increases in production for the capital goods sector. As more stations are needed to meet the demand for electric car charging, more machines will be required to manufacture such equipment at a higher rate.

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Mark Holland

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