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The recent slowdown in capex is not a reason to worry




New orders for capital goods (a good proxy for business investment) have been flat for the past six months. Does this portend an imminent recession? It might, but I think this is a fairly isolated event—I don't see any other signs of a looming recession, such as 1) an inverted yield curve, 2) very high real interest rates, 3) a significant widening of swap or credit spreads, or 4) a significant increase in first-time unemployment claims. In fact, all those classic recession indicators are behaving just the opposite, suggesting that a recession is nowhere in sight. I note further that, despite the slump in the past six months, capital goods orders are still up a strong 9.2% in the past year.


Capital goods orders are a subset of the much larger Factory Orders series, shown in the above chart. Here we see that orders are also up 9.2% in the past year, as well as being up at an 8% annualized rate in the past six months. No slump here, and these growth rates are very strong in an historical context.

One likely explanation for the recent slowdown/slump in capex was the expiration at the end of last year of business tax incentives such as immediate expensing of some capital goods: this had the effect of accelerating orders into last year and thus "borrowing" them from this year. If this is correct, then we should see capital goods orders resume their upward trend by summer.

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