The U.S. Commerce Department has two releases this week that analysts will look to as they try to quantify the role of business investment in the economic recovery – the March advance durable goods release coming out this Wednesday, April 27th, and the Gross Domestic Product (GDP) release for the first quarter of 2011 coming out on Thursday, April 28th.
In the durable goods release, investment-focused eyes will be on shipments of non-defense capital goods excluding aircraft (also known as core capital goods), which edged up by 0.5 percent in February, following January’s 2.5-percent drop. Why? Because shipments of core capital goods [3]—which include computers, industrial machinery, medical equipment and supplies, and heavyduty trucks—track well with the investment component of GDP. These data track so well that one might be tempted to put “SPOILER ALERT” before any discussion of shipments data. So tomorrow’s data on shipments in the U.S. Census Bureau’s durable goods release will offer insight into the equipment and software investment (i.e., business investment) portion of Thursday’s GDP release. Taken together, these two components of this week’s releases provide a solid look at the level of investment by U.S. businesses.
What has the data on shipments told us so far? Shipments data tend to follow what those of us in the data business refer to as a “saw-tooth” pattern, which is evident in the January and February data reports. In other words, they bounce around: a month or two up followed by a month or two down. One way to gauge the size of fluctuations is to calculate the mean absolute change, in other words, the average data changes from one month to the next. For example, from January to February the absolute change was 3.0 percentage points (the absolute value of -0.5 percent minus 2.5 percent). Since hitting a low in April 2009, three months before the official end of the recession [4], shipments growth in the good months began to outweigh the downticks in the bad months, with an average monthly growth in shipments of 0.7 percent and absolute mean change of 1.7 percentage points. So, while shipments have been rising on average, it has been a generally bumpy ride. But bumpy or not, demand has recovered to the point that over $60 billion in goods are leaving our factories every month.
Multiple business surveys echo these trends and point to continued, if not strengthening, growth in business investment through 2011. Respondents to the quarterly Duke/CFO Magazine Global Business Outlook Survey [5] expect capital spending growth over the next year to top 12 percent, the fastest pace since 2004. Further, about one in four small businesses plan to make a capital expenditure over the next three-six months, according to the National Federation of Independent Businesses monthly Small Business Economic Trends [6] report. This marks a clear and continued turnaround from the lows in the teens reached in 2009 and 2010. The Federal Reserve Beige Book [7] anecdotally reinforces businesses’ growing commitment to expand and/or replace aging equipment, as several of the 12 Federal Reserve Districts noted increased capital investment.
While capital investment is a clear expression of business confidence in the recovery, that confidence received an important boost by the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 [8], which has allowed companies to take advantage of accelerated depreciation. And as the economy expands at the same time that the cost of capital expenditures has dropped, the incentives to make these expenditures are growing.
In short, whether Wednesday’s durable goods data are on the upside or downside of the “saw tooth,” the underlying trend should be clear: Capital spending is on the rise, and U.S. manufacturers are benefitting.
~Mark Doms, Chief Economist, U.S. Department of Commerce
April 26, 2011
