KEY DATA: Durables: +3.4%; Civilian Aircraft: +390%; Ex-Aircraft: +1.1%; Capital Spending: +0.5%/ Pending Sales: -2.8%; Over-Year: +13%/Claims: -111,000
IN A NUTSHELL: “There seems to be exuberance entering into business planning as capital spending is really starting to boom.”
WHAT IT MEANS: The massive tax cuts businesses received didn’t lead to a whole lot more investment spending and the pandemic slowed things even more. But that is changing dramatically. Orders for big ticket items rose solidly in January, led by a surge in both civilian and defense aircraft demand. Boeing is starting to recover and that is showing up in the data. But even if you remove aircraft orders, purchases of big-ticket items was still up sharply. There was some weakness in communications equipment orders and, to a lesser extent, motor vehicles, but otherwise, the rise in demand was pretty much widespread. The really key number, nondefense capital goods orders excluding aircraft, the proxy for business investment spending, rose strongly once again. There was also a major upward revision to the December increase and the level of orders set its third consecutive record high.
The housing market remains robust. Yes, the National Association of Realtors reported that pending home sales eased in January. But the level remains extremely high, indicating that demand for houses will continue to be strong over the next few months.
Jobless claims posted a huge decline last week, which is the good news. Indeed, the level was one of the lowest since the pandemic shut things down. But there are some caveats that go along with the data. First, the level, 730,000, remains extraordinarily high. Second, it is not clear how much the brutal weather affected new claims. Third, the December stimulus bill, which refreshed the funding, led to a large uptick in the pandemic emergency program, which is where small business owners/gig workers apply. As a consequence, the total number of people receiving assistance surged back over nineteen million. Conditions are improving, but it isn’t clear how quickly.
Finally, there was a minor revision to fourth quarter GDP growth. It is now estimated to have been 4.1%, not 4%. There was really little new in the revisions.
IMPLICATIONS: Businesses have become exuberant and with the government soon to pass a new, massive stimulus bill and the Fed promising to keep the liquidity tap wide open for a really long time, there is every good reason to believe the optimism is not irrational. The stimulus funding and asset purchases have been so large that they have overcome the negative impacts of the pandemic. By sometime during the summer we should have wiped out all of the economic decline and GDP will have returned to where it was at the end of 2019. That is impressive. But that remind us that we had absolutely no growth for about eighteen months and that raises questions about the level of the equity prices. Some argue that the relationship between U.S. GDP and the value of stocks is less relevant since much of the earnings come from overseas operations. That may be true, but the U.S. has recovered a lot faster than other countries and is likely to have faster growth this year than much of the rest of the industrialized world. Can we get enough earnings from U.S. operations to support the equity values? And then there is the issue of how much longer the funding can continue at the levels we have seen? Keynesian economics is alive and well in the U.S., as the economy is largely dependent on the free money and liquidity being provided by the federal government and the Fed. However, even now, the Biden administration is trying to develop a mechanism to slow and ultimately end the massive flow of cash to businesses and households. When that happens, what happens? It may be too early to consider that issue, but it needs to be in investors’ minds as we move through the year.