Capital Goods New Orders as an Economic Activity Indicator: Definitions

• By Serge Narkevich

US Census Bureau has been providing the Manufacturers’ Shipments, Inventories, and Orders survey since 1957. Due to its monthly frequency and wide coverage, the report has become an invaluable source of statistical data for a plethora of users both in academia and business. While the data covers several aspects of business actions it is the New Orders part that is important for many forecasters. In particular, the new orders for capital goods serve as a crucial input for many researchers. So let's look closer and see why this happens.

Capital goods new orders historical series can be accessed directly on the US Census Bureau website (here) or through other providers like FRED (here) . In order to clearly understand the capital goods definition several economic concepts explanation are necessary (US Census Bureau glossary definitions, that available here, are used below). It is practical to look at it from the classification dimensions perspective.

1. Stage of delivery:

• value of shipments;
• new orders (net of cancellations);
• end-of-month order backlog (unfilled orders);
• end-of-month total inventory, materials and supplies, work-in-process, and finished goods inventories (at current cost or market value).

2. Production vs. consumption dimension:

• capital goods are used to manufacture other goods or commodities and typically include factories, machinery, tools, equipment, buildings, etc.;
• in other words, they are not for consumption but serve to produce other goods and services;
• consumer goods are purchased by households to satisfy their wants and needs; they may be durable or nondurable.

3. Lifespan dimension:

• nondurable goods (e.g., food, clothing, gasoline) are purchased for immediate or almost immediate consumption and have a life span ranging from minutes to three years;
• durable goods (e.g., automobiles, furniture, household appliances) have a significant life span, often defined as three years or more, so their use and wearing out is spread over this span - in this way durable goods include capital goods and consumer durable goods;
• there is some ambiguity about the total durable goods in the survey (in Table 2. Value of Manufacturers' New Orders for Industry Groups) and the capital goods plus consumer durable goods (in Table 5. Value of Manufacturers' Shipments, New Orders, Unfilled Orders, and Total Inventories for Topical Series) - as explained on the US Census Bureau website such an operation does not take into account the intermediate durable goods used to manufacture capital and consumer goods such as Aircraft Parts, Motor Vehicle Parts, and Semiconductors.

4. Industry dimension:

• data are collected and tabulated by the manufacturing industry predominantly by 6-digit NAICS (North American Industry Classification System);
• there are some sub-groups, e.g., all manufacturing excluding transportation, excluding defense or excluding aircraft.

5. Defense vs. non-defense dimension is grouping variant of the industry dimension:

• defense goods are used by the government for the national defense and include small arms and ordnance; communications equipment; aircraft; missiles, space vehicles, and parts; ships and boats; and search and navigation equipment;
• non-defense are produced for use by civil consumers and firms;
• note that in terms of the data reported in the survey these items: small arms and ordnance, aircraft, ships and boats, communications equipment, search and navigation equipment - may be included in both defense and nondefense categories.

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Summing up, capital goods are produced for use by companies in order to manufacture other goods or services. They have a long life span and are typically categorized by industry with defense vs. nondefense capital goods being an important sub-classification.