No Capex Recovery Yet

There was a modest uptick in capital goods orders in June, but the way I see it, orders are roughly flat so far this year. On the one hand this is disappointing, since capital goods are the seed corn of future productivity gains; flat spending at relatively low levels thus foreshadows unimpressive economic growth on the horizon. On the other hand, it's clear that there has been no further deterioration in business confidence or investment spending after last year's free-fall; things have been in a sort of holding pattern so far this year.

None of this is very surprising given the general disdain with which business investment is viewed in Washington. The biggest incentive that business has to ramp up investment spending today is that corporate income taxes and taxes on capital in general (e.g., dividend income and capital gains taxes) could be significantly higher in the future (i.e., invest and produce quickly before things get worse). But that is hardly the thing of which big recoveries are made.

Still, as the chart shows, a big increase in capital spending is not a necessary condition for a recovery. The economy rebounded strongly in the second half of 2003, yet capital spending had not increased meaningfully by that time. So I'll stick with the "glass half-full" interpretation here, and say it's a good thing that conditions are stabilizing instead of declining.

Comments

[Wesley Mouch:]

Thanks for the chart and the analysis.

You say:

"Still, as the chart shows, a big increase in capital spending is not a necessary condition for a recovery. The economy rebounded strongly in the second half of 2003, yet capital spending had not increased meaningfully by that time."

Based on how things turned out, do you still think that the economy really rebounded in the second half of 2003, or do you now think that a monetary-policy-induce... is all that occured? I think the latter; sustainable recoveries will require capital spending, IMHO.

Jul 30 07:56 AM

[Benito Camela:]

In 2003 the economy had the easy credit pump working as if there was no tomorrow, hence we had the illusion that there was growth.

As it turns out, we were building just a house of cards. Now that the house is falling it will take years to rebuild a solid one.

Most corporations see some stability but no signs of a recovery yet, but the stock market is somoking high quality grass and betting that we will grow at 5% soon. Dream on.

Jul 30 08:40 AM