DEFINITION of Capital Goods Sector

The capital goods sector (also referred to as the "industrials sector") is a category of stocks related to the manufacture or distribution of goods. The sector is diverse, containing companies that manufacture machinery used to create capital goods, electrical equipment, aerospace and defense, engineering and construction projects.

BREAKING DOWN 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, the demand for capital goods drops off, usually lowering the prices of stocks in the sector.

How the Capital Goods Sector Is Affected by Other Markets

Sales of inventory produced by machinery that comes from the capital goods sector companies can have a reverberating effect on businesses within this segment. For example, if federal budget constraints shrink defense spending, the aerospace industry could see a decline in demand for its jet fighters. Producers of the machinery used to build those planes would, in turn, see fewer orders.

Comparably, if demand for new cars decreases, the automotive industry may have to slow production and possibly discontinue underperforming product lines. The capital goods sector would see a decline as the demand for factory equipment would diminish.

Aspects of the capital goods sector can face permanent change rather than simply be affected by cascading market fluctuations. The introduction of a new type of product or device could mean expansion for companies in the capital goods sector. The development of alternative energy concepts often calls for new infrastructure to be built. The expansion and spread of offshore wind farms to produce energy will increase demand for the wind turbines that are central to the industry. That means makers of the turbines will need more factories to produce the parts for these massive machines.

Furthermore, the materials needed to construct the turbines will also see greater 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 buildup of many more charging stations to allow these vehicles to operate on the scale of gas-powered vehicles. Machinery used to create charging equipment need to be produced. Some charging stations are built with their own power sources such as solar panels or wind turbines. Increased demand for those components can translate into boosts in production for the capital goods sector. As more stations are needed to fulfill the demand to charge electric cars, more machines to make such equipment will be required at an increased pace.