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Consumer spending drives it all (3)
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Figure 7-7: Swings in real consumer spending (PCE) drive changes in real capital spending
Figure 7-7
Rising and slowing growth in consumer spending on goods and services (real PCE, black line) trigger—usually with a 6- to 12-month lag time—far greater swings in business investment (real capital spending, green line) in the facilities and equipment that produce those goods and services. Consequently, consumer spending is a highly effective leading indicator of future volatile swings in capital spending (see shaded ovals). This is a relationship poorly understood by many economists, particularly “supply-siders,” who incorrectly view capital spending as the key driving force in the economy. Note that capital spending, as the laggard in the economy, remained strong during the early to mid stages of many bear markets (vertical yellow bars). This often deceived unwary investors, well past cyclical peaks, into believing that economic growth was proceeding. Conversely, capital spending typically remains suppressed well past the end of bear markets.
Current Comment: The magnified cyclical strength of capital spending as a response to the upturn in consumer spending in the current cycle is an almost-perfect reflection of past cycles. This chart once again is beautifully illustrating the volatile, lagging role of capital spending in the economy and, looking forward, the vulnerability of the business spending to any slowdown in consumer demand.
Sources: Real personal consumption expenditures: Bureau of Economic Analysis Capital spending: Bureau of Economic Analysis
*Includes nonresidential structures, equipment, and software under gross private fixed investment; excludes residential structures
Updated: 10/3/15