Is there a business boom in the making?
New releases on durable-goods orders indicate there is. Non-defense capital-goods orders (not including aircraft) are up big so far in the fourth quarter — about 10.5% above the third-quarter average at an annual rate according to economist John Ryding. If you take into account that business investment in equipment and software was up 6.5% annually in the third quarter — with double-digit gains in technology — this fourth-quarter spike becomes very significant.
Overall non-defense orders — including primary metals (up 9.4%), industrial machinery (up 4.4%), and computers (up 7.1%) — are now 7.4% above the year-ago mark. The National Association of Purchasing Management (Chicago) reveals that production has jumped big and that new orders are huge. Even employment is up slightly, with weekly initial jobless claims plummeting. At 364,000, they are 45,000 lower than a month ago, and well below the recent peak of 433,000 that occurred in September. Way back in March the cyclical peak was 492,000, so we are 130,000 below that number. Despite the seasonality of hiring, a new jobs revival could be headed our way.
Certainly, these are not recessionary numbers. They are not double-dip numbers. They are not soft recovery numbers. What are they? They are big numbers that point to a business boom.
For whatever reason, stocks have become either coincident or lagging indicators of business conditions and profits in this economic cycle. Normally share prices lead the business cycle. So it’s almost as though the stock market rally that began in early October — including a 21% upturn in the S&P 500 and a 46% gain in the tech sectors — is confirming the upturn in business.
Behind these favorable developments is a considerable improvement in liquidity conditions. The year-on-year monetary-base growth is hovering around 8%. The Milton Friedman M2 money measure is rising 10.3% annually over the past six months. Key indicators show that the Federal Reserve’s last 50 basis-point rate cut has opened the door to even more generous liquidity-adding. Corporate-borrowing spreads have narrowed. Gold is hanging in around $320. And industrial metal prices are also showing life signs.
Investment tax cuts are in the air, too, and if passed next year they will add to the growth story. Free trade is also in the air, as trade negotiator Robert Zoellick is redeeming himself for the sins of steel and lumber protection with a zero-tariff policy for worldwide manufacturing goods. More, the dockworker’s strike is ending, and so will bottlenecks and shortages that have temporarily suppressed production and jacked-up prices. All of these add to the growth story.
Skeptics will keep telling us that there is too much excess capacity to generate a full-fledged business boom. However, underutilized capacity is in fact a classic recessionary bottom signal, while full capacity is a classic boom-peak signal.
What really drives business capital spending is the replacement cycle for new equipment and technology modernization. Such capital spending peaked in 1999 — about three years ago, which is about the length of a tech-product cycle. That makes right now the time to replace and upgrade.
With profit margins widening and cash flows improving, and in an environment of low-interest-rate easy credit, firms can profitably reinvest in capital-spending replacement. This year’s 30% cash bonus for immediate expensing of new equipment is an added plus to businesses, and another depreciation bonus next year will make it cheaper still (after-tax) for companies to spend.
Essentially, the post-election fiscal-monetary policy mix is expansionary and pro-growth. Inside the economy, improving profits and rising productivity will put the easy money and easy tax policies to effective use. Is it premature to talk about a business boom? Maybe. But a lot of positive signs are coming together to paint a much brighter picture.