Rabu, 25 April 2012

Capex no longer bullish

Capital goods orders no longer stand out as a bullish indicator for the economy. Orders have been flat for the past six months, although I note that there have been lots of upward revisions along that have turned from what looked at first like a slump into what now looks like simply a flat trend.

Capital goods shipments (above chart) have continued upwards, however, and this matters because this is the measure of capex that counts for GDP. Still, orders are the leading indicator for GDP, so this is not much to be excited about.

On balance, the recent lack of growth in capex subtracts somewhat from my long-held optimism that the economy will continue to grow, albeit at a disappointingly slow pace, but it is not something that points to recession. I take it as simply an indicator that the economy is likely growing a bit less than I thought. The second chart above shows that capex growth has slowed to zero several times in the past without signaling a recession.

Given that the market still remains burdened by fear, uncertainty, and doubt, flat capex is probably better than what the market has been priced for, so I doubt that it creates downward pressure on equity prices. And indeed, the market is up today because the news on corporate profits continues to be better than expected, and that is a very bullish indicator for the economy going forward.

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