2007 April 14 Saturday
Capital Spending Biggest Worry Of Economists

A survey of economists by the Wall Street Journal found their biggest worry about economic growth revolves around expected capital spending levels.

A new WSJ.com survey found that 20 of 54 economic forecasters responding to a query cited soft capital spending as the chief risk to their forecast that the U.S. economy will grow slowly but avoid recession this year.

Only 11 of the economists cited housing; the rest cited other threats, including inflation and oil prices.

Probably more economists didn't cite housing because housing is already a factored in negative which by itself hasn't pushed the US economy into a recession. They are looking for changes that could bring on a recession and aren't expecting those changes to come from the housing industry.

The three pluses driving the US economy at this point: capital spending, consumer spending, and exports.

Capital spending, along with consumer spending and exports, has been supporting economic growth in the U.S. amid a housing slump, so signs of weakness aren't welcome.

"If there's something that keeps me up at night, it's the potential of corporate America really pulling back," said Nariman Behravesh of forecasting firm Global Insight. "We had expected 5%-to-6% growth in capital spending in the first half of 2007, but now that's down to 1.5%."

The Commerce Department says overall business investment fell an inflation-adjusted 3.1% in the fourth quarter, the first drop since early 2003. And government measures of orders for and shipments of capital goods so far this year have been unexpectedly weak.

The economists are expecting an acceleration of the rate of inflation. Energy and food have the fastest price rises. Basically, food prices are now getting driven by energy prices due to corn's use to make ethanol. Farmers are planting less of other crops in order to plant more corn. The price of corn has nearly doubled in the last few years.

The full article reports a large assortment of mixed signals on the US economy and capital spending. Hard to figure out what it all portends.

The US trade deficit unexpected decreased after months of increases.

The gap fell to $58.4 billion from $58.9 billion in January, the Commerce Department said. Economists had forecast an increase to $60 billion. Imports from China fell to the lowest level since May 2006.

Slower growth in the U.S. might mean lower demand for imported consumer goods and business equipment, while expanding economies in Europe and Japan will add to U.S. exports, economists said.

No, the improvement was not due to an increase in exports. In fact, exports actually fell. The US manufacturing sector isn't becoming more competitive in international markets. Imports fell even more than exports in part due to a decline in oil demand.

The improvement came even though exports fell by $2.8 billion during the month, reflecting lower sales of a variety of manufactured goods from computer accessories to industrial machinery and civilian aircraft.

But imports declined by an even larger $3.2 billion, with the tab for foreign oil falling to the lowest level in 20 months.

People and companies are changing their behavior in order to use less energy. The cost of gasoline has been high enough for long enough that people are beginning to make choices which treat expensive gasoline as a permanent fixture.

At some point the dollar has to decline enough to cause a balance of the huge US trade deficit. But that deficit's size, at over $700 billion per year, means that a substantial part of our living standard comes from living beyond our means. On the one hand, when the party ends we have to shift toward consuming less. On the other hand, when that happens we should find that we'll have greater demand for what we do make. But there's no way to allow that increased foreign demand without slowed wage and/or profit increases. Increased foreign demand must get balanced by decreased domestic demand.

At some point Asian governments will stop buying US debt. The attractiveness of investments in the rest of the world will help bring about a decline in the US dollar.

``The income account is a leading indicator for investors about sustainability of the current-account deficit,'' Wilmot says. ``Paradoxically, the time to begin to worry about the current-account deficit is when it begins to improve, because growth and investment opportunities outside the U.S. are beginning to look more attractive.''

In the fourth quarter, the U.S. current-account deficit amounted to 5.8 percent of gross domestic product, down from 6.9 percent in the third quarter and a record 7 percent of GDP in the last three months of 2005. Yet from 1990 through 1997, it was never worse than 2 percent.

When will the shift come? Will it come gradually? Will it come with the next recession?

Share |      By Randall Parker at 2007 April 14 06:31 PM  Economics Business Cycle

John S Bolton said at April 15, 2007 12:40 AM:

Economists like these treat the $800 billion+ dollar support from foreign central banks as if it were a feature of capitalism or free trade, when it is central planning issuing from socialism and nothing else.
The investment level in the US today represents no free-market impulse, but merely the availability of those foreign government funds, and as such, is really not analyzable by the methods of the economists.
Wall Street has become a distribution center for foreign aid, yet they are paid as if
they were not the equivalent of an aid worker who oversees the construction of a hydroelectric project in Africa.

Kenelm Digby said at April 16, 2007 5:06 AM:

Living in Britain, and being of a certain age I have bben conditioned to believe that the USA is a land of great wealth and all Americans are very affluent - certainly this was the way people spoke about the USA in the 1960s and 70s, the point stressed about Americans was that they were all'fabulously rich'.
Now, these days I compare average US wage rates and the minimum American wage to that obtaining in Britain, and I find that a prevailing exchange rates, American levels of compensation seem very modest indeed!
I realise that exchange rates 'hide a lot', but the current persistance of the low dollar and the fact that it is taken fior granted, in a way that would have been unthinkable years ago, speaks for itself.
On another issue I believe that the markets are 'mentally preparing' themselves for a predominately East-Asian economic powerplay, with the USA increasingly sidelined as 'just another player'.

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