Capital goods orders disappoint

New orders for capital goods in March were substantially less than expected, thanks mainly to a large downward revision to February orders. As a result, capex orders have not increased at all for over a year, although they did rebound significantly from a first-half slump. This is disappointing, since it points to weaker productivity growth in the future (capex is the seed corn of productivity), and a lack of business confidence. This is the core of the economy's biggest problem: a lack of job creation which in turn is the result of business' lack of confidence in the future and reluctance to invest in new jobs, plant and equipment. We'll need to see some real improvement in capex before we can expect a significant improvement in the economy.

The question for investors, however, is whether this disappointing news runs counter to expectations. I've long argued that the market has been priced to gloomy expectations, and that can be seen in such things as the extremely low level of Treasury yields; the strong demand for cash, cash equivalents, savings deposits, and safe assets like T-bills and bank reserves; and the below-average level of PE ratios despite record corporate profits. Weak capital goods orders are just another side of what is basically a lack of confidence and a lack of risk-taking.

So today's capex news is not "new" news and thus is not disappointing to the market. Indeed, I think the market has been quite pessimistic about the economy's prospects for a long time, to the extent that the market is probably priced to a recession. Thus, anything less than a recession is better than what the market is braced for. As I said in a post back in January, avoiding recession is all that matters. There is nothing in the capex data to suggest we're headed for another recession, and there are quite a few areas of the economy (e.g., housing, auto sales, unemployment claims, industrial production, factory orders, the ISM indices) that are obviously improving, and some by impressive rates. On balance, we're left with what we've known for the past several years: this is a disappointing, sub-par economic recovery. But it is nevertheless a recovery, and that's what matters.