August 27, 2019
Business investment remains a critical component for this economic expansion.
Capital expenditures (capex) drive productivity gains (more output per hour worked), which enables economic growth while keeping inflation contained. That helps keep the Federal Reserve (Fed) at bay.
We received an important data point on business investment yesterday, August 25. While headline durable goods orders beat expectations, demand for aircraft drove the increase. Excluding transportation, durable goods orders fell by 0.4%, and the prior month’s figure was revised down to 0.8% from 1%.
On a year-over-year basis, as shown in the LPL Chart of the Day, Slowing Durable Goods Amid Trade Tensions, durable goods orders excluding transportation have been flat over the past year and growth has been slowing since June 2018—covering the bulk of the trade dispute. Year-over-year growth in orders for nondefense capital goods (excluding aircraft) has also grounded to a halt, averaging just 0.3% over the last three months.
“Productivity-enhancing capital expenditures are critical for elongating this economic expansion,” said LPL Research Chief Investment Strategist John Lynch. “Capital investment has softened because of the trade dispute with China, which puts more of a burden on the U.S. consumer to continue to drive economic growth. That can continue for only so long.”
Trade tensions continue to weigh on capital investment and overall economic growth, which is one reason we reduced our 2019 gross domestic product (GDP) growth forecast to 2% (down from a range of 2.25–2.5%). Yesterday’s report told us that business investment is unlikely to contribute to third quarter GDP, which is only expected to grow at a 1.8% annualized rate (Bloomberg consensus).
Markit’s soft preliminary (sometimes called “flash”) manufacturing Purchasing Managers’ Index (PMI), reported August 22, also highlighted the cautious business investment environment. The August reading dipped below 50, in contraction territory, for the first time since the financial crisis. The official Institute for Supply Management (ISM) PMI manufacturing survey, due out September 3, will provide another glimpse into the business investment environment. Given the latest salvo in the U.S.-China trade conflict, another soft reading appears likely in the cards.
Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.
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