Wednesday, March 28, 2012

Business Investment: Tough Row to Hoe

The Lehmann Letter (SM)

A robust economic expansion requires strong household and business expenditures. That's why this letter has followed consumer auto purchases and homebuilding so closely. But business investment in new plant and equipment is also important.

Each month the Census Bureau issues a report on new orders for all durable goods, and within that report the Census Bureau also informs us of business orders for these goods. For instance, the Census Bureau breaks out business orders for new cars from all such orders.

Lately new orders for nondefense capital goods have fluctuated around $80 billion a month:

That's not bad and, as the chart reveals, this number is strongly higher than the recession’s $50 billion trough.

Is this good enough?

Nondefense Capital Goods
(Click on chart to enlarge)

(Recessions shaded)

The historical record says: No. New orders doubled between 1980 and 1990 and doubled again between 1990 and 2000. Peak to peak, that trend would have brought new orders to about $150 billion by 2010. Instead they peaked at $80 billion. Now, following the recession, new orders are back to $80 billion again. Will they reach $160 billion in this decade?

These numbers indicate how rapidly business investment in new plant and equipment must grow in order for business investment to share its traditional role as an important stimulus to aggregate demand.

It's a tall order, but it has to happen if we are to have the rapid economic growth required to restore full employment and sustain a growing stock market.

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© 2012 Michael B. Lehmann

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