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 has yet again played out consistently, with Y/Y capital-spending in 2009 having fallen to even greater declines than those in the production sector. If Y/Y real consumer spending rebounds to 2% or more (see Figure 7-3), Y/Y capital-spending comparisons by late 2010 could easily be increasing, with surprisingly favorable profit comparisons in that sector. However, given the length and depth of the recent decline and their effect on underlying business coinfidence, longer-term gains in the capital sector may prove more grudging.
