Figure 7-5: Swings in industrial production drive changes in real capital spending
Not surprisingly, peak gains in manufacturing (industrial production) are usually followed, typically two to four quarters later (shaded ovals), by peak increases in capital spending (which includes spending on plant and equipment that increases production capacity). The same is true in reverse at economic troughs. The relationship appears somewhat more coincident at economic troughs. Economists rarely adequately forecast the dimension of this multiplier effect.
Current Comment: The classic industrial-production/capital-spending pattern yet again played out consistently in the 2008 downturn, as Y/Y capital spending in 2009 fell to even greater declines than those in the production sector. Then, as industrial production rebounded strongly in 2010 and the first half of 2011, capital spending roared back and and most recently has been reaching the peak cyclical gains of past cycles. However, executives and investors interested in the capital-spending cycle would well to recognize the transient nature of this phenomenon as expressed in past cycles. Such cyclical strength is usually short-lived.