July new orders for capital goods were down a steep 8%, much weaker than expected. Is this hard evidence of a double-dip recession? While it shakes my confidence, I think there is a good chance that the weakness is an artifact of poor seasonal adjustment. Both Brian Wesbury and our own "brodero" noted today the pronounced tendency of this series to drop on the first month of every quarter: "this is the eighth consecutive first month of the quarter (January/April/July/October) where machinery orders have dropped, with the typical decline being around 9%."
The top chart shows the raw (seasonally adjusted) data. The second chart uses a 3-mo. moving average, and it should be immediately obvious that this removes a lot of the noise in the raw data without changing its character or its signal. The third chart shows the 6-mo. annualized growth in the moving average.
Regardless of how you massage the data, the story remains the same: over the past year, the rebound in capital spending by U.S. corporations has been quite strong and is likely ongoing. This is an important indicator not only of business confidence, but also of the economy's ability to grow in the future, since capital spending is the raw material necessary for future productivity growth.
It does not look like we've made much headway since 1998. You have two bubble peaks and subsequent blowouts.
ReplyDeleteIf anything we reached the peak for this cycle which is roughly half way to the peak of the prior bubbles.
from JPM regarding the seasonality...
ReplyDelete"Core capital goods tend to be seasonally weak the first month of the quarter, due to excess seasonality in the machinery category. However, even after accounting for that the capital spending implications still look atrocious. In particular, new orders for machinery declined 15%, the most on record going back to 1992.
There was a modest upward revision to June core capital goods shipments, which implies that second quarter GDP growth is now tracking 1.2% instead of 1.1%. However, even with that revision core capital goods shipments are tracking a 2% annual rate of decline early in Q3, down sharply from a +18% pace in Q2 and +12% rate in Q1.
The down-shift in the pace of capital spending is particularly worrying as this was the strongest, most reliable sector of the economy over the past year."
Whatever spinmeister. That was the worst month over month data point since 1992.
ReplyDeleteInvestment in equipment&software was the second brightest light in the economy, sequential growth of 4.2, 14.6, 20.4, 21.9 SAAR in the last 4 quarters.
Where is the 3-4% GDP growth trajectory now, Scott? Even JPM is musing a negative per capita Q3 GDP print. Hat tip to Public Library. You were on board with JPM who said that the 10T Note was going to 5.5%. rIGHT or Wrong?
Just to rub salt into the wounds of supply-siders that could never publish the bend in the Laffer Curve in a peer-reviewed journal, I will vacate this post with a quote from Keynes.
When the facts change, I change my mind. What do you do, sir?
if we have another bad month, perhaps you can use the 6 month average... then the 12 month.... then the (actually past 12 months, it won't look so good).
ReplyDelete