Capital Investment: Failure to Launch

Friday’s final figures for Q4 2015 growth showed that GDP was stronger than expected, rising by an annualized 1.4% on the quarter versus prior estimates of just 1%. Leading the way? Personal consumption, which rose by 2.4% in Q4. However, non-residential fixed investment—a proxy for business spending—contracted by 2.1%, led by a decline in spending on equipment, structures and intellectual property (such as R&D.) Businesses failed to undertake any meaningful capital investment during the quarter, and unfortunately, the trend looks little better for Q1 2016. Shipments of non-defense capital goods ex-aircraft fell on a month-on-month basis in both January and February 2016, suggesting another contraction is likely in Q1. Not helping the outlook was Q4’s decline in corporate profits, with a retrenchment not only in the petroleum/coal sector (-$124B QoQ), but also in durable goods manufacturing (-$15B) and the financial sector (-$24B). With a 7.8% drop in overall corporate profits in the first quarter—the largest percentage decline in profits since Q1 2011 (-9.2%)—the loss of momentum underscores the difficult choices faced by the Fed. Businesses may choose to invest in people over machinery, but if profits continue to sag, even hiring will eventually sputter.



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Heidi Learner

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