U.S. Businesses Appear to Have Selective Uncertainty
I keep hearing that what is holding U.S. businesses back from expanding and hiring is "uncertainty." Exactly what new types of uncertainty businesses face in the current environment vs. past environments is rarely spelled out. But if, in fact, businesses are paralyzed due to uncertainty, I would not expect them to be stepping up their purchases of capital equipment. After all, capital equipment has a relatively long life. If businesses were unusually uncertain about the long-term outlook, they would be more reluctant to make longer-term commitments, which the purchase of capital equipment is. Rather, if businesses were unusually uncertain about the future, they might be more inclined to hire workers, who, after all, can be dismissed on short notice if conditions were to change suddenly.
But just the opposite seems to be happening. Business hiring remains weak and business capital spending is robust. The capital spending part is illustrated in the chart below showing the 8-quarter annualized growth in shipments of nondefense capital goods deflated by the PPI for capital goods. In the 8 quarters of the current economic recovery/expansion, price-adjusted shipments of nondefense capital goods have increased at an annualized rate of 7.4%. In the prior economic expansion, when, presumably, there was normal or less-than-normal uncertainty, the fastest 8-quarter annualized growth in price-adjusted shipments of nondefense capital goods was 8.6% -- in the 8 quarters ended Q1:2006. I would think that if abnormally-high business uncertainty prevailed today, there would have been considerably slower growth in price-adjusted purchases of nondefense capital goods than what has occurred.
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Author: Paul Kasriel
Paul L. Kasriel
Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
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Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005. The accuracy of Paul's 2008 economic forecast was ranked in the top five of The Wall Street Journal survey panel of economists. In January 2009, The Wall Street Journal and Forbes cited Paul as one of the few who identified early on the formation of the housing bubble and foresaw the economic and financial market havoc that would ensue after the bubble inevitably burst. Through written commentaries containing his straightforward and often nonconsensus analysis of economic and financial market issues, Paul has developed a loyal following in the financial community. The Northern's economic website was listed as one of the top ten most interesting by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets.
Paul began his career as a research economist at the Federal Reserve Bank of Chicago. He has taught courses in finance at the DePaul University Kellstadt Graduate School of Business and at the Northwestern University Kellogg Graduate School of Management. Paul serves on the Economic Advisory Committee of the American Bankers Association.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The information herein is based on sources which The Northern Trust Company believes to be reliable, but we cannot warrant its accuracy or completeness. Such information is subject to change and is not intended to influence your investment decisions.
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