Wednesday, May 26, 2010

Capital spending is very strong



Business investment (new orders for capital goods) fell a bit in April from its March level, but thanks to upward revisions to previously released data, investment was actually up 4% versus the old level for March, and March numbers were revised up by 7%. Thus, as the charts show, capex has grown quite strongly over the past year; stronger in fact than at any time since the series began. I almost hate to say it, because I've said it so many times about different series, but this is clearly a V-shaped recovery, and it's very positive since business investment is what produces the growth and jobs of the future. It's also a good sign that businesses confidence is returning, and profits are being put to good use. There's still a mountain of corporate profits that have accumulated over the years but haven't been spent, so this story could have very long and strong legs; corporate profits after tax have doubled since 1998, but the level of capex spending has not increased at all on net.

9 comments:

Beatotrader said...

V-shaped recovery????
When you touch the sky with a 13.000.000.000.000 of total debt?
When the hypotesis of impact on GDP from Obama stimulus plan is of 1,7%-4,2% on 1° q. 2010.??
When you are near the debt/gdp ratio of the WWII period???
When you have FED endless interest rate at zero degree like never happens in the US history?
I think many of YOU (americans) are living on MARS..
and THIS is a BIG component of the PROBLEM...
You are reading the data in the traditional way but THIS TIME IS DIFFERENT like happens 2 times in a century (on average)....
I'm very anxious because many people in the first economical power of the World are thinking like you...
And the sad thing is that you are very very skilled but you go on blindly through the classical schemes...

Benjamin said...

Beatotrader-

Well, we all can't be as insightful as you, but yes, every poster here is concerned about mounting debt.

On the other hand, the USA flourished after WWII, with that debt load, and handily paid it down.

We can do so again, and perhaps the recent Greek scare will put a fire under the kettle.

BTW, it is a mistake to say the USA only flourished after WWII as the rest of the world was in ruins. The fact that there are large healthy and undebted sections of the global economy, such as the Far East, should make it easier to sustain global economic growth. CDhina can become another locomotive.

I share cynicism that either major US political party has the will to balance the federal budget.

Scott Grannis has held out hope that the Tea Party will come to the rescue. Perhaps so. We have yet to see any trenchant, or even effective, policies emerge from the Tea Party regarding the debt.

But, debt can be paid down, and that would actrually cause our economy to flourish, as was shown by the postwar experience. We had a 90 percent top federal tax rate back then--the good news is that we can balance out budegt today with a much lower tax rate, just by cutting spending.

John said...

An investment theme I am watching closely is spending by corporations on networking and information technology. Also the growth of smartphones and their bandwidth requirements has put pressure on wireless networks' capacity. Big upgrades are going to be necessary to handle the ever increasing demand. The recent recession caused a lot of IT spending delays (shown clearly on the charts) that has cost companies time in keeping their networks viable. Many are playing catch-up and are in no position to continue to postpone their spending in the face of continuing growth in demand.

Playing this theme can be broadly done through Cisco (CSCO) the networking company. It is high quality (very large net cash holdings) and has excellent management IMO. There is an ETF that is small but tracks a number of networking stocks PXQ. Both of these have come down from their highs and offer good entry points in my opinion. DO YOUR OWN HOMEWORK before you invest and prepare to be patient and to endure more potential volatility. There are a lot of paniced investors around these days and a lot of doom & gloom merchants are getting a lot of attention. This can afford patient, rational longer term investors above average returns over time however.

Benjamin said...

John-
Let me pick your brain.
Asia will have mountains of capital and huge upper classes in another generation. That will mean a long-term explosion for capital-management firms in Asia.
Anybody you like?

John said...

Benj,

I assume you mean asia based. This is an area I am not well versed in. Investing directly in China based companies is something I do not feel comfortable doing. It requires specialized knowledge that I do not have consistent access to.

I am sure there are many many services that cater to investors interested in asia. One that I have subscribed to in the past that I thought was OK was from InvestorPlace.com's Robert Hsu. He is an Asian American with experience in Asia and a former Goldman Sachs trader. I read him for awhile and although I liked his ideas I was not 'geared' to his styles. In my experience he was competent. You might investigate him and take out a trial subscription. There is a large model portfolio and good followup to recommendations.

Sorry I don't have something more specific for you.

Tom Burger said...

From an "Austrian Economics" viewpoint, Scott, the problem with this argument is that it ignores the simple fact that investment decisions are largely guided by interest rates. With interest rates artificially depressed by the central bank we are going to get a lot of "malinvestment" --- just as we did during the housing boom.

Capital investment is productive only to the extent that it helps produce more consumer goods in the future -- consumer goods that can be sold at a profit to people who are spending their income, not going further into debt.

Austrian business cycle theory says that after the Fed begins to "normalize" interest rates there will come a time when this cycle's malinvestments will be revealed. Just as happened toward the end of the housing bubble.

Time will tell which view is correct.

Benjamin said...

Thanks John.
If there is such a thing as a "sure bet" it will be an explosion for financial services in the Far East in the next 20 years.
Who will cash in?
I don't know.

Charles said...

My friends on Portage Lakes tell me the pontoon boat dealers are sold out - a good sign.

Public Library said...

This is just about the funniest comedic back and forth I have ever seen and sadly it's 100% true...

http://www.informationclearinghouse.info/article25521.htm