Flash Business Confidence Update
Despite the Tariff Tweet, Capital Spending Plans Held Up in May
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As we stare at a screen of red stock prices due to trade policy concerns we wanted to pass along a couple of positive observations. The Richmond Fed’s May Manufacturing Survey was the last input into our capital spending plans model and we were surprised that capital spending plans continued to recover from the 4Q18 QT stock market crash. While it is likely that capital spending plans will weaken in coming months due to the administration’s trade policy, given that the equity market has been declining for the entire month of May, the ‘tariff tweet’ was on May 5th and there was no pattern of deterioration as through time in the five regional Fed surveys released from May 15 through May 29, the marginal uptick implies the business sector might be more sanguine about trade than the markets.
A recovery in capital spending plans is crucial to our view that strong intellectual property products (IPP - software, R&D) investment will extend the recovery in productivity allowing margins to remain near all-time highs and the economy to expand without an inflationary impulse. Our capital spending plan index has decent forecasting value for investment in structures, capital equipment and IPP one quarter forward. Bottoms-up S&P 500 capital investment remains in double-digits, while the April core capital goods report was soft, we expect a recovery as the inventory destocking cycle decelerates. Business confidence remains vulnerable to the trade war, however, at least in May capital spending plans held up. The secular tailwinds driving capital for labor substitution in services are strong, the software investment boom is likely to continue.
One quick note on yesterday’s the employment component of the May Conference Board Consumer Confidence report. The percent of survey respondents who described ‘jobs as hard to get’ fell to the cycle low and those who said ‘jobs are plentiful’ increased to a cycle high. Both levels were better than the peak of the labor market in the ‘00s expansion, close to the best ever levels at the end of the ‘90s business cycle. The improvement implies labor dynamism improved in May, this is another good sign for productivity and non-inflationary growth.
Barry C. Knapp
Managing Partner
Ironsides Macroeconomics LLC
908-821-7584
https://www.linkedin.com/in/barry-c-knapp/
@barryknapp
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