Wednesday, November 24, 2010

Deutsche Bank on Capex spending

There are three key numbers to watch, listed in order of importance: nondefense capital goods orders excluding aircraft (core durable goods orders), initial jobless claims and personal consumption expenditures. Core durable orders are the most forward looking component of the three series mentioned, although the claims data are a very close second. Capex has been a real bright spot for the economy—we learned yesterday that it grew faster in Q3 than initially reported (+16.8% vs. +12.0%), and that it has risen 19% over the last year, the strongest four quarter increase since Q3 1984 (+20.1%). Some slowdown in capex is inevitable, but we expect a sturdy trend to continue for some time longer for two reasons: one, companies are flush with cash—free cash flow has never been higher; two, industrial capacity according to the Fed is still declining. This situation reflects the significant underinvestment in capex in the last cycle so firms need to replace depleted capital; this still has plenty of room to run given the underinvestment in technology spending in the last business cycle.