The "remarkable" business investment recovery
Businesses are investing in themselves.
Why it matters: Core capital goods orders, or those for durable goods that aren’t aircraft or defense-related, are a proxy for business investment.
- These equipment orders will get fulfilled in the months ahead, so they reflect businesses’ expectations for the future.
- Continued growth in this measure suggests the economic growth we’re experiencing today may not be the peak.
By the numbers: Core capital goods orders increased by 0.5% in June to $76.1 billion, up from an upwardly revised $75.7 billion in May. Year-over-year, this measure is up 16.7%.
What they’re saying: Pantheon Macroeconomics’ Ian Shepherdson says the elevated levels of these orders is “remarkable.”
- “A combination of rebounding earnings and support from the federal government, coupled recently with clear evidence of acute labor shortages, is pushing companies into raising capex in order to expand capacity and remain competitive,” he writes.
- “If you aren't spending but your competitors are, you'll lose market share," Shepherdson adds.
The big picture: “These data points provide insight into businesses’ plans for investment in the third quarter,” Grant Thornton chief economist Diane Swonk writes.
- “Continued strength in computers and electronics offset a small drop in orders in the vehicle sector, which has suffered some of the biggest supply-chain problems due to a shortage of computer chips,” Swonk says.
What to watch: These mounting orders for new capital equipment should translate to higher growth expectations from businesses.
- Meanwhile, the monthly durable goods reports bear watching to see if these core capital goods orders continue to rise.
- “Companies in aggregate are cash-rich, but they remain asset-constrained after a decade of under-investment following the financial crisis,” Shepherdson said. “Accordingly, we expect capex to continue rising at a rapid pace for the foreseeable future.”
The bottom line: Orders for business equipment represent companies putting their money where their mouths are. Whether or not you believe economic activity has peaked, it is the case that businesses are positioning themselves for more growth.