Tags: capital | spending | gdp | economy

Stronger Capital Spending Should Boost GDP

Image: Stronger Capital Spending Should Boost GDP

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Thursday, 25 Aug 2016 10:25 AM Current | Bio | Archive

  • INDICATOR: July Durable Goods Orders and Weekly Jobless Claims
  • KEY DATA: Durables: +4.4%; Excluding Aircraft: +1.1%; Capital Spending: +1.5%/ Claims: -1000


IN A NUTSHELL: “Businesses are investing again and given that capital spending was the weakest link in the last GDP report, third quarter growth could be really strong.”

WHAT IT MEANS: Another day, another day of pretty good data. Business investment reduced growth in the spring by 1.7 percentage points. Much of that came from a reduction in inventories, but big-ticket spending was off solidly as well. It looks like that is reversing in the summer. Durable goods orders surged in July, helped by a huge rise in both defense and nondefense aircraft demand. But just about every other major component showed a rise, including computers, machinery, electrical equipment and metals. Vehicle demand was flat, but that came after a solid rise in June. Critically, nondefense, nonaircraft capital spending, which is the best indicator of private investment spending, rose for the second consecutive month. It hadn’t done that since January 2015. Non-transportation backlogs built, a hopeful sign for future production.

Jobless claims edged down last week. Given we are at near record lows for labor force adjusted new unemployment applications, the drop is another sign that the labor force is tightening further. The insured unemployment rate, which is the number on unemployment insurance as a percent of those who are covered by unemployment insurance, is near its all-time low. This number peaked at 5% in May 2009 and is now at 1.6%. That is another indicator of the labor market’s tightness.

MARKETS AND FED POLICY IMPLICATIONS: Businesses are starting to loosen the purse strings. I have argued that there is a major disconnect between the C-Suite and Main Street and maybe that yawning chasm is starting to narrow. If so, economic growth could start accelerating. Housing starts have started off the quarter strongly and that sector should add to growth as well. So, it appears the economy is indeed beginning to pick up some speed. Of course, after three consecutive quarters of roughly one percent growth, any decent expansion would look great. With the economy looking like it could post a 3% or more growth rate in the third quarter,

Janet Yellen, who talks tomorrow, will have to explain why rates should not be raised. There are three more FOMC meeting this year but one comes the week before the election. This skittish Fed doesn’t seem to be willing to do anything that might make anyone upset, so a rate hike at the November 1-2 meeting looks unlikely. Thus, if the Fed stands pat after the September 20-21 meeting, they will have to wait until mid-December. By then, there should be a whole ton of issues that arise that cause fear and panic at the Fed and convince the members that raising rates a whole quarter point would crush the world economy. In other words, if this Fed is to raise rates, it really should start doing it right away, before the next “crisis” occurs. I cannot wait to hear Chair Yellen’s talk.   

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.

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JoelNaroff
Businesses are investing again and given that capital spending was the weakest link in the last GDP report, third quarter growth could be really strong.
capital, spending, gdp, economy
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2016-25-25
Thursday, 25 Aug 2016 10:25 AM
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