President Obama is scheduled to announce a round of new tax breaks today for corporate America in a bid to stimulate the economy. The timing is no surprise. Worries persist that the already weak economic rebound is still faltering.
At the core of the tax-credit proposal, the Chicago Sun-Times reports, is “accelerating write-offs of investments in plants and equipment and expanding a tax credit for research and development.” If the idea is focused on boosting business investment, the proposal doesn’t come a minute too soon, even though its political viability is questionable at the moment.
In any case, the latest report on new orders for non-defense capital goods excluding aircraft (a statistic that economists use as a measure for business investment) dropped by a hefty 7% in July vs. June. As the chart below shows, that’s the biggest month loss since the recession was formally tearing through the country in 2008 and 2009.
The implication: business investment is stalling, one more troubling sign for the future of the business cycle. True, one month a trend doesn’t make. And if we look at actual dollars committed to this measure of business investment, the trend doesn’t yet look fatal. Since mid-2009, new orders for non-defense capital goods ex-aircraft have been zig-zagging higher, as the second chart below shows. It’s unclear if July’s big retreat is a sign of things to come vs. one more downdraft on the path to even higher levels.
In fact, if the rest of the economy was humming along, the retreat in July of business investment wouldn’t be a worry. But it’s clear that there are other headwinds still blowing, starting with the feeble recovery in the labor market. In addition, the market is still pricing in disinflation/deflation risks. As economist David Beckworth observed yesterday, “eight months on and counting, expected inflation continues to fall at a steady pace…”
One prominent analyst of the business cycle offers this warning today via CNNMoney:
“We already are in a slowdown, so no matter what they do, there is a risk of another recession,” said Lakshman Achuthan, managing director of Economic Cycle Research Institute. He said any action to spur the economy was needed near the beginning of this year when the economy still had momentum.
As we write, stocks in Europe and Asia are down, and the crowd is rushing back into bonds (again). It ain’t over till it’s over, as the saying goes, and the disinflation/deflationary-induced risk aversion that began in May isn’t over.