Wednesday, October 28, 2009

Capex rebounding

One way businesses invest for the future is through capital goods orders (aka capex). Capex has risen smartly this year, probably for several reasons: 1) the decline last year was so severe that it was probably overdone, 2) businesses believe that there is hope for the future, and 3) corporate profitability is improving. Through September, Capex was up at a 10.8% annual rate since the freefall of last year ended last January, and up at a 8.1% annual rate since the low of last April. By either measure, capex is doing much better in the current recovery than it did following the 2001 recession. This makes sense given the severity and depth of the decline last year, but it is also an important confirmation of the fact that we are now in a recovery and things are improving and are likely to continue to improve. Capex is the seedcorn of future productivity, after all.


Anonymous said...

Is capex following the 2001 recession a fair comparison? Didn't the overspending on IT in fear of the dreaded Y2K bug move a lot of capex from 2002 to 1999?

Scott Grannis said...

You have a valid point. Unfortunately, the data series I'm showing doesn't go back further than 1992, so I can't compare today to any other recessions in the past.

But consider this in my defense: Relative to GDP, capex today is 51% lower than it was in Sept. '97, when it reached an all-time high. And it is 48% less than it was in Dec. 1995, which was way before the Y2K spending started ramping up. That suggests that Y2K spending wasn't a big factor distorting things.

In any event, the big story with capex is that it is at very depressed levels relative to GDP today. Corporate cash holdings and earnings are not at very depressed levels, however, and have been improving of late. So there are lots of reasons to expect things to continue to improve.

alstry said...

This is what confuses me when you state....

but debt doesn't create growth since the money that one man borrows must come from another man's pocket.

With fractional reserve banking, simply by changing the leverage requirement, can't we simply create money out of thin air by increasing ratios?

For example, with a 1 to 5 leverage ratio $1 of deposits could create $5 of lending versus a 1 to 10 ratio would create $10 of lending against the same deposit base.

How else could we have over $30 trillion of private debt and only a few trillion in savings?

If everyone tried to pay down debt, wouldn't deposits evaporate before debt was paid off.

Thanks in advance for clarifying something that has always confused me.