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Tags: business | investment | confidence | economy

Strong Business Investment Reflects Improving Confidence

Strong Business Investment Reflects Improving Confidence
(Melpomenem/Dreamstime)

Joel Naroff By Friday, 25 September 2020 06:55 AM Current | Bio | Archive

INDICATOR: August Durable Goods Orders and New Home Sales

KEY DATA: Durable Orders: +0.4%; Ex-Aircraft: -0.8%; Capital Spending: +1.8%/ New Home Sales: +4.8%; Inventories: -8.3%

IN A NUTSHELL: “Business investment activity remained strong, a sign that confidence may be improving.”

WHAT IT MEANS: Orders for big-ticket items are a key indicator of the willingness of companies to bet on the future and the overall rise in demand in August was less than expected. Indeed, if you remove the aircraft sector, which is weird right now as it adjusts to the long-term implications of the pandemic, orders were down sharply. But the details were not that bad. Demand increased for machinery, computers and communications equipment. Boeing’s aircraft order cancellations were down, which helped the numbers even though they were still high. The weakness was in electrical equipment and vehicles. Motor vehicle orders had skyrocketed the previous couple of months so it was not surprising to see a moderate pullback. There was really good news in the measure that represents business capital spending. Nondefense capital goods orders excluding aircraft posted another sharp rise. The level was the highest in two years and second highest in six years. That is a really strong indication that companies think this is a good time to start investing again.

Yesterday, the August new home sales report was released and it was another big one. Demand jumped above one million units annualized for the first time in nearly fourteen years. That is amazing, as is the sector. That said, the details weren’t quite as great. Sales were off in the Midwest and West, and rose moderately in the Northeast. It took a double-digit increase in the South, where about sixty percent of the sales are recorded, to get the total into positive territory. Inventories, or the lack thereof, remain the major concern. They are at about half of what they should be, and the sales rate adjusted 3.3 months of supply is the lowest on record. That’s why there are bidding wars for homes and they are selling above asking price in some areas.

IMPLICATIONS: The August durable good release was one of those skip the headline, examine the details report. Economists were expected a better number and the more modest overall rise was a little disappointing. But the sharp rise in the key indicator of business spending points to continued growth, though maybe not nearly at the level we had been seeing. And that should not be surprising as we are closing out what will likely be the strongest growth in GDP in history. So, decelerating from the reopening-induced, artificially high pace is something everyone is expecting. Indeed, the massive rise in home sales is setting the sector up for a let down over the remainder of the year. And that raises the real question: How fast do we slow? The September numbers will start providing some answers, but we are not likely to have a good handle on things until the end of the year. For now, let’s enjoy the reopening of the economy and we can start worrying about next year in a month or two.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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JoelNaroff
Business investment activity remained strong, a sign that confidence may be improving
business, investment, confidence, economy
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2020-55-25
Friday, 25 September 2020 06:55 AM
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