Hello US capital spending?
The US has managed a steady but sub-par economic recovery with the crucial missing ingredient being a sustained pick-up in capital spending. There is some evidence this may be changing since last week’s second revision for 2Q14 GDP pointed to the main two engines of investment spending starting to fire simultaneously. It may be too early to declare the start of a new capital spending cycle, but for pretty much the first time since the post-2009 recovery started, both private residential and non-residential fixed investment look to be turning up together.
The initial phase of the recovery between 2009 and 2011 was driven by an upturn in manufacturing and export activities, while the housing market was a drag on growth. But just as housing bottomed in mid-2011 and construction started to pick-up, manufacturing fell back into a funk as exports faltered. Since mid-2013 there is clear evidence of improved conditions within the manufacturing and residential housing sector. The severe winter weather affecting the US disrupted capital spending decisions, but improved operating conditions are now feeding through to more investment being undertaken by both corporations and households.
Last Thursday’s GDP report
real nonfinancial domestic sales (real gross value added as proxy) rose by 2.7% YoY, compared to 1.9% in the previous quarter. This confirms the strong 2Q sales figures reported by listed companies. This upturn is important because it is stronger sales growth which usually provides the spur for companies to make capital spending decisions, usually with a three-month lead time.
In particular, business capital spending is showing a steady improvement with [real private] non-residential fixed investment in 2Q rising 8.4% QoQ annualised, revised up from 5.5%. Separately, the latest US durable goods report showed that capital goods orders for June (non-defence and aircraft) were revised up from a MoM growth rate of 1.4% to 5.4%.
We also see evidence that homebuilding is set to make a decisive recovery. Three years after the US housing market turned like the proverbial worm, the inventory overhang of repossessed homes has been worked through. To date, construction has been fairly slow to pick-up. We estimate that US households are growing by about 1.4mn annually, but new homes are being added at a rate of only 1.1mn units. This is about to change; stronger than expected housing starts and also issued building permits in July indicate that US home builders are ramping up production. The NAHB housing market index rose to 55 in August, higher than the expected 53, pointing to builders being increasingly confident in the sustainability of the residential construction recovery.
Full confirmation of a decisive rebound in private fixed investment should be bullish for equities as the nagging worry for investors has been the sustainability of this bull market in the absence of a strong capital spending component to the economic recovery. In particular, we favour industrial companies which should be clear winners in any capacity expansion.