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, capital spending roared back and, as of year-end 2010, was increasing at an even faster rate than industrial production.
The recent strength in sales of capital-spending companies such as Caterpillar is a classical “late-cycle” phenomenon in economic recoveries, a sign of the recovery a year earlier, but having little positive effect on the outlook. Capital spending will prove vulnerable to any forthcoming slowdown in consumer spending and industrial production.
