KEY DATA: Durable Orders: -1.6%; Ex-Aircraft: +0.1%; Capital Spending: -0.1%/ Paychex Index (Over-Year): -0.88%
IN A NUTSHELL: “Businesses are just not investing and that is a worrisome thing for the economy going forward.”
WHAT IT MEANS: Productivity has been growing minimally and it was hoped that the tax cuts would trigger a surge in capital spending. Well, maybe not. Durable goods orders tanked in February, but that was largely due to a massive drop in Boeing airplane demand. Nondefense aircraft orders were off over 30%. Even excluding aircraft, demand for big-ticket items was up only modestly. Some of the most critical sectors, such as computers, communications equipment, vehicles and machinery, all posted negative numbers. There were gains in metals and electrical equipment, but that was it. But the most disconcerting number in the report was the proxy for private sector capital spending: It also eased back. For the first two months of 2019 compared to 2018, orders are up just 2.6% and that gain is not inflation adjusted. In other words, so much for the investment boom.
Friday we get the March employment numbers and there are some differing indicators of how strong it could be. The Supply Managers’ manufacturing employment index popped and the NFIB index has been trending upward. However, the Paychex/HIS Markit Small Business Employment index keeps showing slowing job gains. That decline continued in March and it has translated into a wage gains bouncing around, rather than continuously accelerating.
MARKETS AND FED POLICY IMPLICATIONS: The capacity of the economy to expand depends heavily of firms being more efficient and that requires investing in new equipment, buildings and software. While capital spending is growing, it is doing so at a pace that is not likely to improve productivity markedly. With labor markets tight, it is hard to see how growth can accelerate sharply for any extended period. I had based, at least to some extent, my 2019 solid growth forecast on the supposition that it takes time for firms to ramp up large spending decisions and by early this year, we should be seeing those decisions turn into actual orders. That has yet to happen and given the worldwide slowdown and consumer cautiousness, I am no longer expecting a second round of business investment increases. If investors look at the fundamentals, what they will see is that wage gains are accelerating, productivity is lagging and household and business spending is rising moderately, at best. With world growth also slowing, it is hard to see where profit growth is going to come from, especially since this year’s numbers have last year’s tax hyped gains as comparisons. Fed Chair Powell has already bowing once to the screams of the markets and this forecast of modest earnings growth makes me wonder what he will do next. For me, the risks are not balanced, as the Fed claims, but are skewed toward the downside.