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Business Investment in Durable Goods

Posted by Joseph Trevisani on Feb 27, 2013 10:49:00 AM

Business Investment in Durable Goods

 

Business investment is one of the main pillars of the economy.  When businesses spend, particularly on plant and equipment, it is an early indication that managers anticipate better sales and a pickup in the economy. 

ScreenHunter 667 Feb. 27 11.42 resized 600In January business investment jumped 6.3%, far ahead of the prediction for a flat month and the 0.3% fall in December. It was the largest increase in monthly orders since an equivalent acceleration in December 2011. A 13.5% leap in machinery orders was the primary driver.

The durable goods orders category that tracks these investment choices is called, capital goods, new orders non-defense, ex-air, meaning goods designed to last more than three years bought by businesses excluding government orders to the defense industry and civilian aircraft and parts. The composition of this number is also close to the business investment component included in the GDP calculation used by the Bureau of Economic Analysis.

Defense orders are withheld because they occur irrespective of the general state of the economy and therefore are not a good indicator of overall economic direction. Civilian aircraft orders are also left out because of the sheer size and variability of the orders at Boeing Corporation of Chicago.  For instance January’s durable goods orders were down 5.2% from December, but withholding aircraft and parts brings the orders to +1.9%. The difference is that in December, before the problems with the 787, Boeing received 183 new aircraft orders, in January they got two.

Business investment spending is volatile. In the past four years it has surged more than 6.0% twice, and more than 5.0% three times, but none of these occasions, in the end, predicted a period of sustained economic growth.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets


 

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