Just-released November durable goods orders data point to a big rise in business investment last month.
Orders of nondefense capital goods excluding aircraft, commonly referred to as “core capex,” were up 4.5%, well above the Wall Street consensus estimate of 0.7% growth and marking a stark turnaround from the 0.7% decline observed in October.
Core capex — a key measure of business investment — has been one of the most notably lacking aspects of the economic recovery, and many of our favourite Wall Street strategists, economists, and portfolio managers have flagged capex as the “most important chart” to watch in 2014.
Today’s numbers, then, are a good sign — especially in the context of improvements in other areas of the economy.
However, there’s a bit of a catch, as Adrian Miller, director of fixed income strategy at GMP Securities, points out in a note to clients following the release.
“With the market seeking evidence of a broadening economy since business investments has been one of the main missing components, November durable goods data provided such evidence,” says Miller. “And yet, and you know there had to be an ‘and yet,’ we must remember that there are two expiring tax programs relating to investing in R&D and depreciation tax credit that allows companies to write off 50% of equipment purchases that expires at the end of the year. So we are likely seeing a rush of companies taking advantage of the looming deadline effectively pulling forward business spending.”
Miller is referring to Internal Revenue Code §41, which expires on December 31.
December durable goods orders data are likely to reveal a similar surge in core capex this month, but crucially, it will be important to see how these gains carry over to January.