Megan C. from Stamford, CT asks: Hi Mitch, Hope it’s been a nice summer. I know the economy is doing well at the moment with lots of spending and travel. Is there anything else you see indicating strength that people are not talking about as much?
Mitch’s Response:
There are plenty of positive, underappreciated fundamental indicators in the U.S. economy at the moment! I’m glad you asked this question. It offers me a good opportunity to remind investors that most of what we see in financial media coverage – higher consumer spending, busy travel, restaurants, and hospitality scrambling for workers, inflationary pressures – are largely priced into markets. If the data is widely known and discussed, it probably does not have much pricing power.1
One key area of underappreciated strength is business investment. We’ve seen a trend in the U.S. where companies are increasing orders for machinery, software, and other equipment to expand productivity (given the tight labor market) but also to reshape their businesses in the wake of the pandemic.
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Nonresidential private fixed investment, which is the economist measure of business investment, increased at a seasonally adjusted annual rate of 11.7% in Q1, following double-digit increases in Q3 and Q4 of last year. The biggest outlays in spending came in software and tech equipment, which makes sense as businesses prepare for a future of less customer contact and more of a hybrid work model. As you can see in the chart below, business investment has now eclipsed pre-pandemic highs:
Another measure of business spending is to look at orders for nondefense capital goods, which to note are near the highest levels since the 1990s (when recordkeeping started). As I mentioned earlier, businesses are noticing a landscape of scarce workers, and are thus spending on equipment and other capital to increase productivity.
In the last economic recovery (2008-2009), worker productivity took a long time to recover, and businesses largely turned to hire workers because labor was cheap. In this recovery, labor is tight, which is driving businesses to spend more on capital instead. I think U.S. capital spending could continue soaring past pre-pandemic levels in the coming quarters, which would make its pace incredibly faster than business investment after the 2008 Financial Crisis.
I think this is a major underappreciated fundamental that could drive another leg of the recovery forward after this initial surge in consumer spending tapers off.
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