Good news, guys.
It looks like American businesses are putting more and more capital to work.
Check Out This Chart
The above chart of capital spending reflects total real investment in capital goods excluding aircraft. (Even the government knows airlines are worthless!) Capital goods are goods purchased to produce…well, more goods and services. It’s business investment.
We really bounced back quickly in the 2008-2009 period relative to 2000-2005. If I had to pin it on something, I’d say it has a lot to do with long-term bond yields (domestic capital expenditures are cheaper in the long-run) and dollar strength/weakness. The dollar was far more valuable in 2005 than it is today.
Oil and natural gas undoubtedly played a part in the quick rebound. Capital expenditures in domestic oil and gas discovery have been huge in recent years – and that’s a good thing.
US manufacturing is coming back. I wrote about this awhile back in a post about Harvard MBAs with manufacturing backgrounds. Manufacturing is coming stateside, though it won’t be the manufacturing we’re used to – it’ll be capital-intensive manufacturing where we have a competitive advantage thanks to low borrowing costs. Read: not much job growth, but jobs created will be high-paying.
Capex is forward-looking. Businesses only make large capital expenditures when they’re excited about the future. Confidence is up.
The conspicuous topping pattern is somewhat concerning. Why is it that we can’t seem to top $65-70 billion per month in capex before recession strikes? Weird, but I don’t think it’s really all that important. Capital expenditures are a derivative of total capacity utilization. If capacity utilization trends higher, we might make a new high in monthly capex this business cycle.
I continue to believe we have a very clear trajectory for future economic improvement. Energy plus manufacturing plus housing improvement makes for a good case to bet on America going forward. Of those three variables, only housing is trending down.
I really don’t know what to make of housing in the short-run. There’s a lot of supply to work through. But housing prices are significantly cheaper on a price-to-rent basis than the historical average. If a home is just a way to avoid rent, housing prices should be much higher today than they are right now. My guess is that housing’s weakness is all about liquidity – if you can’t sell, why should you buy?
Once housing recovers, the consumer recovers. As housing is one of the very few ways for individuals to expand their personal balance sheets, it’s the driver of the consumer. Europe may get headlines, but housing should be the story.