Uncertain Business Managers, Who Won’t Stop Investing
I don’t normally put too much weight on monthly data swings; it’s best, always, to look at the broader picture. But I’m going to take some cheap points today by directing everyone’s attention to this morning’s factory orders report.
“Factory orders edged up 0.8 percent in October, the Commerce Department said Wednesday. That compared to September when orders had jumped 4.5 percent.
Orders for core capital goods, a category viewed as a good proxy for business investment plans, increased 2.9 percent in October, the biggest increase in eight months.”
Why is this important? Well, in case you haven’t heard, there’s this thing coming up on January 1st called the “fiscal cliff,” which, according to nearly every mainstream economist and newspaper, is frightening business managers. The problem with this story, however, is that it is at odds with the data, which show that businesses are actually investing quite a lot, especially given how much slack is still out there in the economy.
And I’m not just talking about this morning’s factory orders report. If we take a step back and look at overall equipment-and-software spending by businesses, the story is quite telling.
The above chart plots equipment-and-software spending as a share of real GDP. As can be seen, the series is basically back to prerecession levels. And so the whole notion that the economy is being held back by a lack of investment spending because business managers are uncertain is absurd on its face. Any more investment spending than what we currently have would put us into bubble territory, which should not be welcomed by anyone.
Now, it’s undoubtedly true that many business managers are claiming to be uncertain because of fiscal policy. But there’s a difference between “claiming” to be uncertain and “being” uncertain. As I’ve mentioned, repeatedly, serious economists look at revealed preferences rather than stated preferences. It would be great if we didn’t have so many pointless surveys asking business managers about how they’re feeling or about what mood they’re in or whatever, but such is the world we live in.
Nevertheless, one would think that competent analysts would be able to sift through the madness and focus on what’s important. Unfortunately, as the fiscal-cliff debate demonstrates, that’s apparently too much to ask.
 It’s important to look at just equipment-and-software spending rather than total private investment because the structures component of investment spending is still being held back by an excess supply of properties in the commercial real estate market.