About the Demand for U.S. Capital Goods

Demand for US-made capital goods has been increasing faster than expected, analysts have found. In August 2013, the demand for capital goods increased more than it did during the previous three months. Much of what's driving this increase seems to be a rising demand from overseas clients who are willing to invest in their own manufacturing potential. While the overall demand for durable goods has fallen 0.1 percent—significantly less than analysts expected—the rise in orders for non-defense capital goods shows no sign of slowing down.

Capital goods are any kind of equipment used primarily by businesses in the course of their operations. A set of machine tools can be considered a capital good, as can a truck that hauls cargo. When used by an end consumer, the same truck is not a capital good but rather a consumer good, as it isn't being used to increase return on an investment.

The US manufacturing industry is heavily dependent on capital goods manufacturing for much of its trade. An uptick in this sector is good news for makers of machine parts, fleet vehicles, and other durable goods. Industrial giants such as General Electric and Ford derive much of their revenue from capital goods sales, and the general increase in sales volume positions these manufacturers to continue to drive the US economic recovery.

The high demand for capital goods can be traced back to the Developmentalist policies of Asian countries such as China and India. The economies of these countries greatly depend on manufacturing, and they therefore tend to encourage reinvestment in equipment and infrastructure. The uptick in orders for these durable goods may be taken as a sign that overseas manufacturers are banking on a profitable future and don't want to be left out when their own customer demand picks up.

While the trend toward greater capital goods production seems to be part of a trend, it's important to remember that overseas markets can be volatile and unpredictable. Given that the majority of orders are clustered in a small number of countries—two or three, really—it isn't outside the realm of possibility that the trend could suddenly reverse in response to a sudden shift in policy among these markets.

These days, any good news for US manufacturing is good news indeed. An increase in the demand for domestically produced capital goods represents a continuation of overseas industries' willingness to plan ahead and project a profitable future. While the gains aren't guaranteed to last, and the overall reduction in demand for consumer goods isn't comforting, the upswing in orders for capital goods paints a picture of what the slow road to recovery might look like.

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