Core CAPEX As A Recession Indicator

by: Doug Short

A few months ago, Business Insider posted a commentary with the attention-grabbing headline: DAVID ROSENBERG: Here's Your Big Red Flag That We Could Be Heading For Recession. Rosenberg has frequently included CAPEX among his various recession indicators, but he focuses on a specific manipulation of the data: the year-over-year three-month moving average.

Yesterday morning, the Census Bureau released the October Durable Goods report for data through December. The CAPEX referenced by Rosenberg is the Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft data series, which is conveniently available in the FRED database. The data goes back to February 1992, so we only have two recessions during this timeframe to evaluate CAPEX as a recession indicator. Here is a look at the monthly data.

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Here is a year-over-year percent change of the series.

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And, finally, the chart below is the YoY of a 3-month moving average of the complete series. There is a logical manipulation, given the volatility of the series.

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Indeed, the CAPEX 3-month MA trended down from March to September of this year, when it hit an interim low of -6.6%. It has since risen to -3.3%, which is the level we saw at the onset of the 2001 recession and lower than the -1.1% at the start of the last recession.

CAPEX 3-MA: Cherry Picking by Recession Doomsters or Something to Really Worry About?

Ultimately, my sense is that this data series manipulation (the YoY 3-month MA) has an insufficient track record to be considered a persuasive recession indicator. N=2 is not enough to make reliable recession probability forecasts. But the CAPEX trend is an attention grabber, and I will continue to monitor it for the next several months.

Here are my routine monthly Durable Goods updates:

The next Durable Goods update, including CAPEX, is scheduled for February 27th.

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