Capital Goods Spending Increases

What That Means for Consumers and Investors

Capital Goods Spending Increases
September 22, 2015

Amid the stock market chaos of the last full week in August, the Commerce Department issued a bit of good news. Seasonally adjusted orders for nondefense capital goods (excluding aircraft) increased by 2.2% in July to just under $70 billion. That represents the first time that value has topped a 2% increase since June of 2014. Defense-related capital goods showed an even higher percentage increase of 22.3% as spending rose to $11 billion. New orders for all durable goods improved by 2.0% to $241.1 billion.

Higher spending on capital goods indicates further economic growth by acting as the precursor for increased consumer spending. Manufacturers are not going to invest in capital equipment and new items to improve capacity unless they anticipate a higher demand for their products. That effect ripples all the way through the supply chain from raw materials to the final consumer product. Consumer spending accounts for approximately two-thirds of economic growth as measured by the Gross Domestic Product (GDP). Spending increases on the defense side do not directly affect consumer demand, but they do improve the income of defense-related companies and provide their employees with jobs and discretionary income.

So does this report mean that good times are ahead even with all the chaos on the stock market? Not necessarily. The Commerce Department report is based on the results of the Manufacturers' Shipments, Inventories, and Orders Survey from July, before the August stock market turmoil ever took effect.

GDP numbers support increased economic growth as second quarter GDP was revised upward to 3.7% — but again, that is lagging information and not leading information. For the expansion to represent a true change in the business cycle and not a momentary surge, capital spending needs to increase for multiple months in a row to show continued optimism amidst the volatility. While July's 2.2% follows up on the 1.4% increase in June, there have not been three successive months of gains within the last two years. Measures of consumer confidence have been equally volatile, making it difficult for manufacturers to feel comfortable with expansion.

The capital goods numbers seem disconnected from the broader market right now, because the market is focused on broad future conditions. Much of the economic downturn is related to China and their slowing economy. A company that is dependent on China for much of their sales may be expanding at exactly the wrong time, while a company making consumer goods for the U.S. market may well be justified in their expansion. It requires case-by-case analysis.

In essence, an increase in capital goods spending is a good economic sign, but must be taken in the context of other economic data and with respect to trends and momentum. Increased capital goods spending contributes to an improved stock market, but does not translate directly to it.

Similarly for consumers, increased capital goods spending should indicate increased demand, and could affect prices and inflation depending on how fast supply is changing with demand, but it does not directly correlate to higher consumer prices. Pricing depends on how well individual companies have predicted demand for their goods and their production costs and acted accordingly.

Keep capital spending in context, and look at the likely impact on your individual holdings instead of making investment decisions on broad economic data. As for consumer spending, keep it simple. Buy it if you need it and can afford it. Your individual economic situation and the interest rates you have to pay on any borrowing are more important than speculation on refrigerator or automobile prices.

Photo © Waurick

  Conversation   |   30 Comments

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Erin | 09.22.15 @ 14:59
"Buy it if you need it and can afford it." Exactly. I don't really pay too much attention to what is going on among other consumers. Just because others are able to buy things doesn't necessarily mean I can and vice versa.
Heather | 09.22.15 @ 15:01
So what exactly does this mean or really nothing at all. The article starts off with good news but then says the higher numbers don't really mean a positive upturn in the economy. I'm more confused now then ever.
Britt | 09.22.15 @ 15:02
I would think that it's a good thing that more people are buying consumer goods.
Nancy | 09.22.15 @ 15:03
Glad things are looking up. I hope the GDP continues its increase. We could all use some long term good news.
Daniel | 09.22.15 @ 15:03
As times take a down turn, or really anytime, stay within your means, Sure you can read and see all about what others do but your choices need to be based on you
Chrisitna | 09.22.15 @ 15:03
My ex-husband had an issue with buying things to keep up appearances... which is one of the big reasons he is my EX.
Kyle | 09.22.15 @ 15:04
As long as people are buying things they can afford, then good for them!
Kailie | 09.22.15 @ 15:06
A rise in consumer goods, means that people have more money to spend. This is good.
Morgan | 09.22.15 @ 15:08
I'm a compulsive shopper. I can't help it.
Katie Greene | 09.22.15 @ 15:09
We are a nation built on consumerism. Good info to look at though. The news needs more articles like this and less about silly frivolous things.
Beverly | 09.22.15 @ 15:09
I take most reports given to us with a grain of salt. They can be a good indicator, but lately not so much. I think most people don't even pay attention to them and are doing their own thing anyways.
Angie Taylor
Insurance Agent in Montevallo, AL | 09.22.15 @ 15:09
I wish i was able to spend more money on things I wanted, but... when times are tight
Kate | 09.22.15 @ 15:11
We can barely afford to purchase what we need, muchless extras each pay check. I have never kept up with those who could buy to just buy and not worry about making ends meet and paying the bills..
Steffanie | 09.22.15 @ 15:30
If you can afford it then buy away.
irene | 09.22.15 @ 15:35
I suppose it's good for the economy if people are spending but to me it still feels like it's best to be careful with money and not make any unnecessary purchases right now.
Carla | 09.22.15 @ 15:40
Buy if you can afford it. Look at the long term effect on your finances. Do you need it or just want it? Can it benefit you in the long run?
Kathryn | 09.22.15 @ 15:47
Isn't this a good thing? People are putting their money into things they need and not things they want.
Sarah | 09.22.15 @ 15:58
Uhm... yeah. I will keep buying what I need as I can afford it and not stress.
Jackie | 09.22.15 @ 16:02
I don't pay much heed to that type of report. I gauge spending by what I need and not by what I want.
trish | 09.22.15 @ 16:05
It all comes down to the line "keep it simple" Live within your means.
Bobbie | 09.22.15 @ 16:14
Consumer spending should always be kept simple. Speculation is like looking into a foggy crystal ball, that is not how I determine my own spending patterns.
STOKES | 09.22.15 @ 16:15
I buy what I need when I can afford it. That doesn't mean other people can afford it.
Tina | 09.22.15 @ 16:26
I buy within my means - might not help the economy much but it helps me not to panic in uncertain economic times.
Christina | 09.22.15 @ 16:30
If people are buying what they need or what they can afford, then it's a good thing that they are able too.
Zanna | 09.22.15 @ 16:36
"Increased spending could affect prices and inflation." So good news may increase prices, bad news increases prices, indifferent news increases prices. I'm seeing a slight pattern here.
Angie | 09.22.15 @ 16:49
It's interesting how one aspect of the economy is affected by another. Can you imagine what it would be like if all suddenly became good savers and bought only the basics? I think the growing economy depends on the fact that not everybody saves as well as our grandparents did. Sobering thoughts...
Jo Ann | 09.22.15 @ 16:51
Well I feel the increase is a little bit of hope the economy is slowly recovering. But i also feel that this indicator needs to be combined with other indicators before we go out and do some crazy investing or spending. At least if the bottom falls out, its not such a huge drop.
George | 09.22.15 @ 16:52
Hope that the GDP numbers keep rising. Its sad there have not been three successive months within the last two years. Hope things will turn around for the good.
steven | 09.22.15 @ 16:56
You know its called buy what you are able to afford. Do not go over your means to be like others... On that note good that people are buying goods still.
Sara | 09.22.15 @ 17:02
You know people all buy different stuff. So I guess it only makes sense that consumers still buy.
$commenter.renderDisplayableName() | 12.01.20 @ 14:53