Thursday, June 24, 2010
New orders for capital goods in May were 17% higher than a year ago, and that amounts to very strong growth in business investment. At this pace, capital spending will regain its 2008 high in about a year. That's much faster than the recovery from the 2001 recession, when it took six years to recover to previous highs. But as impressive as is the growth rate of business investment currently, the level is remarkably low, given the absence of growth over the past 10 years. Moreover, corporate profits after tax have doubled over the past 10 years, yet business investment is flat. Cash is piling up in corporate coffers, and much of that cash is effectively being borrowed by the federal government to fund its deficit.
While things are definitely improving on the margin, the underlying strength of the economy is being undermined by deficit-fueled government spending that we can be sure is far less productive than if the same amount of money were being spent by the private sector. Once again, a reason to expect that overall growth in the economy will be less than robust (which, given the depths of the prior recession would be on the order of 6-8%), but still somewhat better than average (long-term trend growth is probably 3%). So I'm sticking with my forecast of 3-4% growth over the next few years.
Posted by Scott Grannis at 8:32 AM