December has brought the first good news on capital spending in a long while. The Census Bureau reported that non-defense capital goods orders in October rose a remarkably robust 14.5 percent from the September level and that in September they rose 4.0 percent over the August level.
These are big changes from the slide in such spending noted during previous months. Past discussions in this space have pointed out how that paucity of business spending was putting the economy at risk, not just for the moment but also for the long term. Had it continued, they argued, it would not only have constrained the economy’s overall productive capacity, but because new equipment embodies new technology and new thinking on processes, business’ unwillingness to spend also threatened labor’s productivity growth and, indirectly, wages. The October surge offers some hope that the depressing trend may have turned. Of course one month does not a trend make, and even with this latest jump, new orders for non-defense capital goods remain 5.3 percent below their level of twelve months ago. But the report is good news nonetheless.
Whether the trend has really turned will depend on the whys and wherefores of past weakness. Previous, more pessimistic discussions had identified three reasons forces prompting corporate mangers to sit on piles of cash for so long and remain so reluctant to spend: First is the legacy for the great recession. It was so severe and caused so many firms to approach bankruptcy that managers were naturally loath to take the risk of spending on any expansion plans. Second is the aggressive legislation coming out of Washington, in particular the Affordable Care Act and the Dodd-Frank financial reform law. Whatever the merits of these bills otherwise, their broad scope created enough uncertainty to discourage risk taking among managers. Third is the prevailing anti-business tone in Washington that has reinforced the impact of both these other adverse influences.
Older discussions had identified the passage of time as a great healer in this process, time to erase the greatest fears instilled by that recession, time for managers to gain an thorough understanding of the business implications of complex laws. Against this background, it is hard to argue that the underlying caution could lift so suddenly. Ardent Trump supporters no doubt would ascribe the change to enthusiasm over his presidency, but it would be a stretch indeed for him to change matters overnight, not the least because the upsurge began before anyone knew the results of the election. Prudence, then, would recommend a wait and see attitude with a careful weighing of the next few month’s data. But for the moment, even with severe reservations, this is welcome news.
Thirty Tomorrows 