Tunnel boring machine (TBM) rolls off a production line. (Photo by Zhang Hengwei/China News Service … [+]
China News Service via Getty Images
Typically, the media gives scant attention to the Census Bureau’s monthly report on new capital goods orders. Their negligence is understandable. The subject seems arcane and lacks the attention-grabbing quality of news on jobs or real estate. Nonetheless, the oversight is unfortunate, for business decisions on new equipment tell of the economy’s future productive power and even more important, of the level of confidence among business decision makers, an especially sensitive matter after the shock of the pandemic. On both counts – spending and confidence – these recent figures put overall economic prospects into a positive light.
The Census Bureau release is remarkable in may respects. Orders for new capital equipment, after plunging in response to the lockdowns and quarantines of last spring, surged 20% in July and August, the most recent period for which data are available. Even abstracting from the budgeted jump in orders for defense-related equipment, civilian orders for new productive equipment rose 19% during these two months. That would amount to a 190% increase were it to persist for a year, an unprecedented jump by any comparison. The drop last spring was so precipitous that even this recent surge leaves such orders some 17% lower than a year ago, but at the recent rate of increase they should quickly erase that deficit.
To be sure, much of the swing involves orders for new commercial aircraft. For obvious reasons, these fell especially hard during last spring’s lockdowns and quarantines. Airline executives must have doubted that traffic would ever return or even whether their firms would survive. Certainly, they had no incentive to upgrade their existing fleets much less enlarge them. But that dreary sense began to lift as the lockdowns eased last June. Airline decision makers re-established formerly cancelled orders and actually added new contracts to the mix.
Abstracting from these swings in purchases by airlines, the pattern of new civilian capital goods orders looks tamer. They fell less during the anti-virus strictures and have come back less dramatically with the economy’s reopening. The Census bureau records that these orders rose 4.3% in July and August. Even this muted figure is impressive. It amounts to a 30% annual growth rate, still unprecedented and enough to all but erase the spring shortfall. Such orders for capital goods other than aircraft are only 1.4% below year ago levels. Though that improvement stands on its own, there is no reason to dismiss the surge in orders from airlines. After all, they constitute a spending flow into the economy and also signal an encouraging surge in the confidence among business decision makers. According to the Census Bureau, the recent overall upswing in non-defense capital goods orders has brought the monthly dollar flow for capital goods purchases to some $75 billion, almost $900 billion a year, about 4% of the whole economy.
Such a dollar commitment not only should lift the economic activity over time, but because it also speaks to high levels of confidence among business decision makers, it signals a widespread desire for expansion, which will create still more spending down the road by business. Because that expansion will also prompt hiring, it points to a rise in consumer spending as well. In other words, the pattern should build on itself. These decision makers could, of course, be wrong. They are not clairvoyant. But itself the willingness to spend and hire makes future growth more likely. It is a prophesy that is to a high degree self fulfilling, making these data extremely encouraging about overall growth prospects.
