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.
The Capex being flat to lower was a key feature of the Great Depression. Amity Shlae's book "The Forgotten Man" made it clear that intrusive, anti-business New Deal legislation by FDR made Capex spending perilous. It was a period in which it was unknown if business regulation or taxation would unexpectedly turn a 5yr economic contract into unprofitable scrap. FDR and associates often seemed to act on whim, but always anti-business.
ReplyDeleteMuch like today's environment. So this should not be surprising.
I guess I am puzzled as to how you can point to 2003 as an example of a beneficial recovery.
ReplyDeleteNow we know (don't we?) that the last recovery was an unsustainable, artificial boom caused by ultra low interest rates and loose money. With the trillions of dollars in bailout money of various kinds, it even seems clear that virtually all of the "income" generated during that recovery was illusory.
If that's what we get again it's not going to be anything to celebrate -- IMHO.
Microsoft out today talking about how they are changing their corporate mindset to reflect a "new normal" with GDP growth in the 1 to 3% while adjusting their business model accordingly.
ReplyDeleteI suspect this will occur throughout the economy. Those businesses hoping for the old dqys will suffer the consequences.
Unless the government manufactures another bubble, it is naive to expect anything less with 10% unemployment and an economy driven 70% by consumerism.
Life just does not work out that way I am afraid.
With Microsoft's sterling record of copying others' ideas rather than engineering their own creativity, I'd be inclined to file this under the heading of "bellwether indices." How long has it been since they had an original or valuable thought?
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