Capital expenditures help increase productivity, and improved productivity is the foundation upon which developed economies can sustain higher growth rates. Recent data, some of which we highlighted yesterday, continue to confirm that we might be seeing a rebound in capex, but how can we know it’s sustainable?
Clues that capex may be rebounding have been increasingly apparent in “hard data” that represent actual economic activity. When trying to determine whether the increase in capex can be sustained, survey-based, or “soft data,” can useful. One of our favorite soft data indicators is the new orders component of the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index. As our LPL Chart of the Day shows, this component tends to be a leading indicator both for capex and the overall economy. While off its recent peak in December 2017, it’s held above 60 for 13 consecutive months (above 50 indicates expansion), the longest sustained level of strength since 2004, as our LPL Chart of the Day shows.
“We are encouraged by the ISM’s sustained strength, as increased business capital expenditures, or ‘capex,’ remain one of the most important pieces for improving the long-term growth trajectory of the U.S. economy,” said LPL Research Chief Investment Strategist John Lynch.
For our take on recent “soft” and “hard” economic data on capex, check out our Weekly Economic Commentary.
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The Institute for Supply Management (ISM) index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.
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