Is the US pulling back on investment?

Nervousness about the US recovery following a slump in durable goods orders must be tempered by context. Not only are the data volatile, but for many big ticket items optimism about the future is emerging.

Durable goods orders in the US fell sharply in December, missing expectations and sparking fresh nervousness over the US recovery. On face value the data does looks pretty grim, and a dismal way for American business to end 2013.

Orders fell by 4.3 per cent in the month. Excluding the volatile transportation component (primarily airplanes), durable goods orders fell by 1.6 per cent.

But is the data really as bad as the headlines suggest? Not really. In fact, business investment is likely to have increased at a faster pace than in the September quarter.

Graph for Is the US pulling back on investment?

Durable goods orders have the unfortunate distinction of being both important and market-moving, while simultaneously volatile and heavily-revised. It is a combination that makes it perfect for knee-jerk reactions.

At times like this it is always worth reminding ourselves that a single month does not make a trend, nor does a single month mean a great deal. Instead we should look at the December quarter, where we find that durable goods orders were actually up 2.5 per cent in the quarter and up 0.4 per cent excluding the volatile transportation component. Rather than falling, the quarterly data suggest that the pace of business investment growth picked up in the December quarter.

If the data were disappointing it is only because it is perfectly reasonable to have higher expectations at this point of the recovery. Job creation in the US has been solid and the unemployment rate is on the decline, while measures of business and consumer sentiment are improving. Households are spending more and increasing asset prices have people feeling wealthy for the first time in years (though a little less wealthy now than a week ago).

Taken at face value it seems like a good time for businesses to increase investment and look to expand, particularly given the shortfall in investment activity since the onset of the global financial crisis. However while business investment continues to trend upwards it lacks the urgency we might expect to see during a recovery.

Disappointingly, business investment in the US still remains below its pre-crisis level, a fact with serves to underscore just how deep the recession was, its global reach, the incompetence of Congress and the inability of monetary policy to gain significant traction (thought there has obviously been an effect).

Nevertheless, business investment continues to expand and that activity has likely picked up further throughout the December quarter. We will know for certain when US GDP is released on Friday, with current expectations that GDP growth will be around 0.8 per cent in the quarter.

Markets have been routed over the past week as a result of increased concern around the US economy and mounting crises in some emerging economies. But it would be unwise to consider these durable goods data as a sign of impending US weakness. The data is volatile and often heavily revised and the underlying trend points to increased growth in business investment to end 2013.

While it is certainly possible that the US economy could slow significantly as the Federal Reserve tapers (it wouldn’t after all be the first time), we shouldn’t jump at shadows. All the available evidence at the moment suggests that the US economy will continue to rise at a moderate pace in early 2014. If the US does slow it will show up in spending data and the labour force – measures of economic activity that are far less volatile and more reliable than durable goods orders.

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