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 (spending on plant and equipment that increases production capacity). The relationship appears somewhat more coincident at economic troughs.
Current Comment: As in most previous economic recoveries, the early burst of growth in industrial production (with similar growth in the services sector) in 2003-2004 resulted in even stronger growth in real capital spending. Similarly, the recent slowdown in production growth has triggered a somewhat greater slowing in capital spending growth, and the two now appear to be in equilibrium. However, participants in this sector should prepare for a significant slowdown if consumer spending growth weakens further and triggers a further downtrend in the rate of growth in industrial production.
