It is more typical that bulls have to push back against bearish contentions, with charts showing a series of concerns that need to be addressed. The Fed’s actions, valuation, profit margins, tax policies, and a host of other issues are raised when investors attempt to smear the rally that has been in place now for the past four months. And, there is this wonderful debate about “soft” versus “hard” data with ISM now seen as just a diffusion index for new orders despite its lead indications, and the same can be said of hiring intentions.
Too much information has come in showing robust activity such that it is getting harder to suggest weakness. ISM, consumer sentiment, consumer spending, durable goods orders, hiring plans, capital budgets, homebuilding, etc. all intimate strength, but the doubters then shift attention to new fears. In essence, previous concerns that dissipate are just replaced with new points of anxiety.
Yet, Figure 1 illustrates that bean-counting CFOs have become more willing to spend money on capital investment in a fashion that hasn’t been seen for several years. The Duke University survey always has led actual capex and there’s little reason to think otherwise now with the oil patch looking to lift budgets meaningfully. Moreover, as laid out in Monday Morning Musings: Capex Revisited and Ramped Up, a review of more than 760 companies’ capital spending plans show rising dollars too. Thus, the burden is on the skeptics to find reason why the upturn will not happen when it always has in the past.
Not as impressive as the Morgan Stanley index but impressive enough:
Our composite Capex Plans Index posted its fourth consecutive gain in February, climbing 1.7 points to 24.6—a post-recession high. While the recent surge in our index is promising, actual capital spending will depend largely on the evolving outlook for fiscal and regulatory policy.
Our composite Capex Plans Indexgained ground for thefourth consecutive month, climbing 1.7 points to reading of 24.6 in February—a high since 2007. Between October and February, the indexhas gained 12.1 points, representing the largest four-month gain since 2011 and matching a post-election surge in a range of business and consumer sentiment surveys (Exhibit 1).
While the recent performance of the index supports a brighter outlook for equipment investment through mid-year, comments from the regional Federal Reserve Bank surveys suggest that actual spending will depend largely on theevolving outlook for fiscal and regulatory policy.
For now,growth in equipment investment appears to be recovering, posting its first positive Q/Q reading in 4Q16 after four consecutive declines and on track for another gain in Q1 based on our current tracking (see Treasury Market Commentary:2/27). The Capex Plans Index is a three-month moving average of a population-weighted composite compiled from monthly regional Federal Reserve Bank surveys measuring 6- month capex plans and tends to lead growth in equipment investment by about 3 months (Exhibit 2). The more volatile monthly capex plans index increased 0.5 points to 25.8.
Growth was a bit lopsided in February—planned capital spendingincreased in two out of thefiveFederal Reserve Districts that compose our index. The largest gain was reported by the Kansas City Fed, which showed an 8-point jump on top of a 10-point increase in January. Capex plans were roughly steady in the Dallas, Philadelphia and Richmond Fed Districts, changing by 1, 0 and -1 points, respectively, while the New York Fed district reported a 3-point decline. Overall,gains in capex plans appear to be leveling off after having surged in November or December.
With monthly gains in capex plans leveling off, it appears that further upside—and actual spending—will largely depend on clarity around the new Administration’s fiscal and regulatory policy agenda. Comments from the regional manufacturing surveys, highlighted below, support this notion; fora number of respondents, recent increases in capex plansappear to be based on optimism rather than hard orders.
To be fair, the New Orders index in the ISM Manufacturing Reporthas gained over 6 points since October, signaling a pick-up in reported orders on an economy-wide basis.
Moving to the near-term outlook for equipment investment, the January durable goods report suggests a temporary pause within a strong recent trend. Core capital goods orders fell 0.4% in January after a 3.3% rebound over the prior three months,and shipments also declined. Nevertheless, we see equipment investment on track for a strong gain in 1Q17,and our February Capex Plans Index suggests that businesses remain poised to invest—so long as fiscal policy delivers on its promises.