“Business spending has been the recovery’s bright spot,” notes Kelly Evans in today’s Wall Street Journal. “Now, it too may be fading.” We’ll know for sure, one way or the other, later today, when the update on durable goods orders is released. Meantime, it’s premature to say this indicator has succumbed to the dark side. But the risk can’t be dismissed, given the recent weakness in the overall economy.
“The most important component in the durable goods report is the data on nondefense capital goods orders excluding aircraft, a key gauge of capital spending that correlates with the equipment and software component of the quarterly GDP report,” writes Pimco’s Anthony Crescenzi in his book The Strategic Bond Investor. “Fluctuations in capital spending tend to coincide with changes in business confidence levels.”
The good news is that recent numbers for business spending leave room for optimism. As the chart below shows, the latest report for June pegs business spending at its highest level (on a seasonally adjusted basis) since the recession ended.
But as Evans reminds, the trend is weakening. In the second chart, consider the rolling 12-month change in business spending. Clearly, gravity is taking a toll. The annual pace is still healthy, but the margin of comfort is fading fast.
Unfortunately, economists are expecting more of the same for July. According to Briefing.com’s consensus forecast, non-defense capital goods ex-aircraft fell 0.6% last month.