Thursday, May 24, 2012

Business Investment: Trouble Brewing?

The Lehmann Letter (SM)
Business new orders for machinery and equipment fell in April and have not grown in the last three months. It's a bad sign if that plateau extends through the summer.

This letter has spoken of a bifurcated economy: Housing flat while everything else expands. If business investment in plant and equipment also flattens, that would reinforce housing's drag on the economy.

Look at the chart and you will see a great deal of noise in the data. Business's new orders for machinery and equipment are volatile because they include aircraft orders which fluctuate sharply from month to month. But you can see that new orders must break through the $80 billion ceiling to exceed the pre--recession peak. Only then will we know that business capital expenditures are leading the economic expansion.

Today's bulletin from the Census Bureau reported $70 billion in new-equipment orders for April:

That's not encouraging, but could be attributed to the noise in the data mentioned above.

New Orders for Nondefense Capital Goods

(Click on chart to enlarge)

(Recessions shaded)

This statistic is worth following. It doubled in the 1980s and doubled again in the 1990s. It failed to do that from 2000 to 2010. We can breathe much easier when it passes $80 billion and then climbs through $100 billion.

We will closely follow this report in the remainder of the year.

CORRECTION:  Thanks to John Pak for pointing out that that sentence above link should refer to $billions, not $millions.

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© 2012 Michael B. Lehmann

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