Figure 7-7: Swings in real consumer spending (PCE) drive changes in real capital spending
Consumer spending on goods and service (real PCE, black line) triggers—usually with a 6- to 12-month lag time—business investment in the facilities and equipment that provide those services (real capital spending, green line). Consequently, consumer spending is a highly effective leading indicator of future volatile swings in capital spending (shaded ovals). Note that capital spending, as a laggard in the economy, remained strong during the early to mid stages of many bear markets (vertical yellow bars), often deceiving unwary investors into believing that economic growth was proceeding well past cyclical peaks.
Current Comment: As long as real consumer spending continue to grow year-over-year at its recent pace of approximately 3%, real capital spending should be able to maintain positive growth as well. As this chart clearly shows, however, and slowing of year-over-year growth in consumer demand from current levels would likele trigger declines in the capital-spending sector.
