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Capex remains flat




New orders for capital goods, a good proxy for business investment, have been flat for the past year. This is somewhat discouraging, since it points to a lack of confidence on the part of businesses, and it portends reduced productivity growth in the future. But it's not necessarily a precursor to a recession. If anything, it simply reflects the well-known fact that the economy has been growing very slowly for the past few years, and it suggests that growth is likely to remain disappointingly slow for the rest of the year. No surprise.

Even though the lack of robust growth and the still-high unemployment rate are deeply disappointing, it remains the case—as I have been pointing out continuously for the past three and a half years—that the economy has been doing better than expected. The only thing that moves markets is the unexpected; if the market expects a recession but instead the economy grows a measly 1-2%, that is a positive. I've argued repeatedly that the market has been priced to very weak and even recessionary conditions, as reflected, for example, in the extremely low level of Treasury yields and the below-average level of PE ratios at a time when corporate profits have been extremely strong. So if the economy continues to grow slowly and avoids a recession, then equity prices are likely to continue to move higher.

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