Thursday, September 27, 2012

Business investment is disappointing


If capital goods orders are a good proxy for businesses' confidence in the future, then the outlook for future growth is not very promising. This chart is just about the only one I follow that paints a clear picture of a slowdown. Some argue that the decline in capex this year is payback for the expiration of favorable tax treatment this year, but I note that the weakness has only been noticeable in the past three months (June-August). This lends support to those who argue that business investment has declined because businesses are losing confidence in the future, and that the looming fiscal cliff at the end of this year likely has been the catalyst for mounting concern. Whatever the case, declining business investment means less growth in the future—because investment is the seed corn of future productivity gains.

I would add that this somewhat gloomy investment outlook confirms the message of 1.6% 10-yr Treasury yields: the market's collective wisdom calls for very slow growth for the foreseeable future. Pessimism still trumps optimism in today's market.

8 comments:

Dr William J McKibbin said...

I concur with Scott regarding the weaknesses in heavy manufacturing -- my suspicion is that the big government Democrats and military-industrial Republicans will collaborate to create a massive new wave of military spending that will propel heavy manufacturing upwards and forwards starting in 2013 -- let's fact it, industries such as consumer electronics have abandoned the US as their home for manufacturing operations (not a single mobile phone sold in America today is manufactured in the US, leaving only defense electronics in the game on US soil) -- in the mean time, QE3 essentially decouples the Main Street economy from the military-industrial economy -- my hunch is that fiscal policy in 2013 will provide the military-industrial complex with vast new funding that will be created via monetary expansion that will be forcedc upon the Federal Reserve as a fait accompli of fiscal appropriations (which will then be blamed on QE3 in some deceitful manner) -- the reality is that austerity is off the table at this point, at least at the Federal level - the competition for monetary funding between guns and butter is not over...

Dr William J McKibbin said...

PS: The gap between the DOW industrials and DOW transportations is telling...

Joseph Constable said...

This bad economic news is great for the stock market. After the election when the FED starts buying treasuries in addition to MBS, the action should get really bullish. No I haven't heard them say they would buy Treasuries, I am just thinking they will. The primary dealers must be stuffed to the gills with Treasuries and the FED needs to take them off their hands.

They will probably move up the inflation red line to 3.5%. Shortly thereafter they will say, “No, really, 4% is better”. This double tap in a short period of time will really juice up expectations. Wow. Are we ever going to be hated by the world.

Still, I think real estate with maximum leverage is the way to go. You are paying back the loan with cheaper money especially over a long term. And, you get capital appreciation keeping up with inflation hopefully. (But not any real estate – ya gotta be very careful). Besides, if all goes to hell, you still have the real estate. So buy what you want to keep.

I am connected to the military industrial complex. The prime contractors have speed up deliveries of orders. I think the government is trying to get as much product in before defense cuts becomes a major theme.

brodero said...

If I had to choose I would follow the jobless claims data...52 week moving average of non seasonally adjusted jobless claims...

12/23/11 406,592
3/24/12 395,167
6/23/12 385,280
9/23/12 377,630

This moving average is moving up when quarterly real gdp is negative

Donny Baseball said...

Dr. Bill
Do you read the news? The DoD is set for huge cuts and the Lightworker is leading the polls. How exactly are we going to flood the military/industrial zone?

Rob said...

"I would add that this somewhat gloomy investment outlook confirms the message of 1.6% 10-yr Treasury yields: the market's collective wisdom calls for very slow growth for the foreseeable future. Pessimism still trumps optimism in today's market."

So .. slowly, slowly Scott begins to accept a reality that for so long he had railed against. Those ridiculously, shockingly low Treasury yields could only be a temporary blip before the market woke up ! Now, though, the rates are "confirmed" by the market's outlook ... a subtle rewording ... all of which just goes to show once again that economists are great at predicting the past !

Scott Grannis said...

I'm not saying I accept the market's forecast. My point all along--for the past 4 years--has been that the recovery would be sub-par, but that the economy would prove to be stronger than the market expected, and thus I have been bullish. It has indeed been the case that the economy has proved to be stronger than expected (by the market), while at the same time being weaker than I expected. In the end, the only thing that matters is whether the economy ends up being stronger or weaker than the market expects.

I continue to believe the economy will do better than the dismal expectations priced into Treasury yields.

Rob said...

OK, thanks for replying / explaining.

You concede: "while at the same time being weaker than I expected"

I see my role here, when not verging on troll territory, as acting as a check and balance to your enthusiasms, Scott. As we have discussed before, and as you have conceded, you have a habit of letting your (relatively Pandora-ish) enthusiasms colour your predictions. As you know, just because some were right doesn't make you a prophet.

Your latest post, quoting de tocqueville and some other chap, once again harps on about the importance of an all-American economy based on "doers" rather than parasites / complainers / victims. With the Election approaching your "enthusiasm" for this narrative has taken on a new urgency - literally life or death.

You assumed I was one of life's whiners / victims / parasites when I raised this matter befor. But, at the risk of being summarily dismissed again, let me say this:

Those who "succeed" or "win" in a capitalistic society may indeed do so because they have "pulled themselves up by their bootstraps" ... but equally they may have done so because they were lucky, privileged, morally dubious in choices they made and allegiances they forged. They may have made their money by corrupting society at large with addictive, destructive products and services.

And of course those who "lose" and are "victims" may also have been "doers" who made huge efforts to play the game but still lost, for a multitude of reasons beyond their control.

American "exceptionalism" can be a very brutal, very ugly place because it makes so many simplistic assumptions about "winners" and "losers".

And I say all this as a believer in capitalism as the worst way to run a society ... apart from all the rest.