I’ve been worrying about business capital spending. The quarterly figures in the GDP accounts were negative in Q4 2006, and the monthly data on orders for durable goods have been headed south–until today.
The blue line includes everything, but jumps up and down a lot with aircraft orders. I tend to focus on the green line, which excludes aircraft. Orders ex aircraft are still down from their peak, but the uptick is very welcome.
The fundamentals are in good shape for business capital spending. Many industries are near full capacity, profits are strong, and debt-equity ratios are falling. There’s both the need and the financial ability to spend more. The declines in orders have been surprising. Although we are not out of the worry zone yet, neither are we throwing in the towel and calling for a recession.
Business planning implications: Companies in capital goods industries (excluding construction-related equipment) need to keep watching their sales and inventories very carefully; other businesses can stick to a middle course, not worrying unduly about recession. But do your contingency planning.