Manufacturing renaissance or another (finite) investment cycle? That’s one question that’s inevitably raised by the manufacturers’ orders data like that released by the Census Bureau this morning. I took a deep-ish dive in the historical statistics available on the Census site and think it’s ultimately too soon to tell. But the numbers for what economists call “core capex” do provide some of the strongest evidence available that something good and lasting may be happening in domestic manufacturing.
Technically, core capex is spending on capital goods less aircraft and defense-related products. This category is seen as the best proxy for business spending on materials, equipment, and machinery because the defense sector dances to the government’s tune, not the free market’s, and aviation orders are highly volatile.
Today’s Census release told us that August orders for such goods increased a little less than 0.4 percent over July’s levels on a seasonally adjusted basis – less than the 0.6 percent rise reported in an advance report issued late last month. Year on year, these order are up 7.31 percent. (These figures are all unadjusted for inflation.)
How does that compare with manufacturing’s recent past? The year-on-year figure compares well with August-to-August totals going back to 1992 (the earliest easily available data) – not the economy’s best performance (the 17.78 percent annual surge during manufacturing’s strong 2009-10 rebound from the Great Recession), but far from its worst, even outside recessions.
But the most important message sent by these annual totals is that core capex doesn’t rise and fall steadily or gradually. Though not as dramatically up and down as aircraft, it’s pretty volatile, too. And its greatest jumps reliably follow its worst nosedives.
The biggest drop-off by far happened between 2008 and 2009, when the Great Recession took hold. On an August-to-August basis, it cratered by 25.62 percent. In fact, during the entirety of that recession, business purchases of these products sank by 25.37 percent. Yet the next year came that nearly 18 percent August snapback, which was followed by an 11.07 percent rise. In fact, so far in the present recovery, core capex spending is up 45.43 percent.
Impressively, these last five years of growth have been stronger than the recovery from the previous recession – which featured a 16.13 percent August-to-August decline in non-defense, non-aircraft capital goods spending. Over the five years once the early 2000s downturn ended (in November, 2001), core capex increased by only 28.82 percent.
Skeptics might argue that the last recession’s core capex drop was much deeper than the previous recession’s – so the rebound naturally was stronger. But this spending category’s performance also stacks up very nicely against such investment during the 1990s expansion – which was led of course by technology investment.
That expansion began in April, 1991 and continued for nearly 10 years. I only have data going back to February, 1992, but from then through the so-called Clinton boom’s end, core capex soared by 79.66 percent. The current recovery is now a little more than five years old – just over half the length of that 1992-2001 period – and its core capex spending is actually ahead of its predecessor’s pace.
So everyone concerned with domestic manufacturing’s health – and that should include everyone concerned with the overall U.S. economy’s health – is entitled be encouraged about the trends in core capital spending. Let’s hope tomorrow’s monthly trade and jobs reports contain equally good news.