Hello US cap­i­tal spend­ing?

Financial Mirror (Cyprus) - - FRONT PAGE - Mar­cuard’s Mar­ket up­date by GaveKal Drago­nomics

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.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.