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Business investment is disappointing




If capital goods orders are a good proxy for businesses' confidence in the future, then the outlook for future growth is not very promising. This chart is just about the only one I follow that paints a clear picture of a slowdown. Some argue that the decline in capex this year is payback for the expiration of favorable tax treatment this year, but I note that the weakness has only been noticeable in the past three months (June-August). This lends support to those who argue that business investment has declined because businesses are losing confidence in the future, and that the looming fiscal cliff at the end of this year likely has been the catalyst for mounting concern. Whatever the case, declining business investment means less growth in the future—because investment is the seed corn of future productivity gains.

I would add that this somewhat gloomy investment outlook confirms the message of 1.6% 10-yr Treasury yields: the market's collective wisdom calls for very slow growth for the foreseeable future. Pessimism still trumps optimism in today's market.

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