Thursday, July 26, 2012

Capex remains flat

New orders for capital goods, a good proxy for business investment, have been flat for the past year. This is somewhat discouraging, since it points to a lack of confidence on the part of businesses, and it portends reduced productivity growth in the future. But it's not necessarily a precursor to a recession. If anything, it simply reflects the well-known fact that the economy has been growing very slowly for the past few years, and it suggests that growth is likely to remain disappointingly slow for the rest of the year. No surprise.

Even though the lack of robust growth and the still-high unemployment rate are deeply disappointing, it remains the case—as I have been pointing out continuously for the past three and a half years—that the economy has been doing better than expected. The only thing that moves markets is the unexpected; if the market expects a recession but instead the economy grows a measly 1-2%, that is a positive. I've argued repeatedly that the market has been priced to very weak and even recessionary conditions, as reflected, for example, in the extremely low level of Treasury yields and the below-average level of PE ratios at a time when corporate profits have been extremely strong. So if the economy continues to grow slowly and avoids a recession, then equity prices are likely to continue to move higher.

4 comments: said...

Yeah, you really have to 'squint' to see much growth. But, yet, stocks appear to be being induced higher.

'cept AAPL ;)

Sent from my MacBook Pro.

al fisher said...


Love your site, one of my 1st reads of the day. I think you will change your view concerning interest rates after you read this article. Very thought provoking, but makes a lot of sense in what we see today in the interest rate world.

Scott Grannis said...

I've known Lacy Hunt and Van Hoisington for a long time, and I know that they have been consistently calling for lower long-term yields for many, many years. As such, they probably have one of the best interest rate forecasting track records of anyone I know. I haven't always agreed with their reasons for calling for interest rates to decline, but their current views are very similar to mine. Where we differ, I think, is in how long yields are going to remain depressed because of excessive federal borrowing. I think they believe we will have too much government, too much debt, and too much borrowing for a very long time, and thus they see an extended period of very low rates ahead. In contrast, I think that we are going to see improvements (in fact, the federal deficit as a % of GDP has been declining for the past two years) in these same areas that will lead to rising yields in the years to come.

So our diagnosis of the economy's current malaise, and how that gives us low interest rates, is very similar. Where we differ is in how soon things can change for the better.

Benjamin Cole said...

No two national economies are exactly alike. But within the American context, we are looking more and more like Japan.

I also expect interest rates to remain low, near zero, for the indefinite future. If the Fed targets 2 percent inflation--and that is what Bernanke says he is going, and even so the inflation-phobiacs accuse him of being "easy'--then we will likely see very slow growth, little or no inflation and near-zero interest rates for years and years possibly decades, See Japan.

So far, this outlook for very low interest rates has held up.

The world of the 2010 is not the world of the 1970s. The inflationary pressures have largely been eradicated (unionization) or offset (huge trade).

The conventional Fed policy tool for stimulus--lower interest rates--is about as useful as a firehouse against a flood.

Yet Grannis' charts show secular decline in interest rates going back 20 years. The trend line is to zero, and we getting there.

Grannis needs to ask himself this: Why the long-term secular decline in global interest rates? What is the cause of that? (And remove all partisan sentiments before approaching this question).

Is it permanent?

What would cause interest rates to ever climb north, globally? Is that likely?

Okay, if we are stuck at zero bound, then what are central bank options for stimulus?