Factoring the record pace of Boeing’s distortions on durable goods, the series has picked up in the past two months after major and large upward revisions to June’s estimates. The increase in growth encompasses nearly all of the subsegments, as new orders and shipments for both durable goods (ex transportation) and nondefense capital goods (ex aircraft) increased measurably over July 2013. As with new home sales, that diverges somewhat from the seasonally-adjusted figures as the SAAR in July was a bit below June’s level (in capital goods especially).

ABOOK Aug 2014 Durable GoodsABOOK Aug 2014 Durable Goods Cap Goods

Where these growth rates might seem to indicate economic expansion, there is still an enormous gap between even the past two months and what recovery actually looks like. There is no doubt that these data points are better than earlier in the year, but we don’t know yet how much of that relates to the inventory cycle that is as yet unextinguished (I think it heavily involved).

ABOOK Aug 2014 Durable Goods RecentABOOK Aug 2014 Durable Goods Cap Goods Recent

Capital goods, in particular, remain well below growth rates that would be consistent with even modest investment. These estimates here are certainly not a full and comprehensive review of capital expenditures, but if they are even close to representative then the narrow focus on monthly changes misses the actual corrosion in the economy. A recovery, as I have said before, is more than just positive growth it is a return to previous trends that were only, supposedly, temporarily interrupted by business cycle recession.

That “temporary” interruption doesn’t appear to be the case as numerous factors have taken what seems like ages just to revisit the prior cycle peak. Not long ago, Stanley Fischer, Vice Chairman of the Federal Reserve, noted the disconnect (for him) between the economy and productive investment. If we use the chart immediately above for capital goods, that isn’t at all plain. The growth rate post-2012 is clearly down from where it was earlier in the “recovery” but still advancing at a positive rate with much better results in the past two months.

However, drawing back and widening the perspective shows just how big the gap really might be. We go from a cyclical slowdown that lurches between concerning and hopeful to a full-blown problem that has devolved into a structural deficiency that underpins much of the economic malaise we now take as “normal.”

ABOOK Aug 2014 Durable Goods Cap Goods SAAR

At the peak just prior to the dot-com recession, in August 2000 (almost fourteen years ago!), the level of capital goods investment reached $66.6 billion. The latest SAAR for July 2014 was $72.6 billion, or just 9% above that long ago peak. And it took the latest “breakout” just to put some distance from that level, as recently as October 2013 were capital goods orders still below August 2000.

ABOOK Aug 2014 Durable Goods Cap Goods SAAR2

Undoubtedly, a good proportion of that late 1990’s surge in capital spending was based on an artificial premise of dot-com and tech, funded by an enlarging stock bubble of IPO “money” flowing to any small business with a California address (preferably Bay area) and domain name (not even an IP was required). Even if we factor such momentous waste of resources and recalibrate to something more modest, the current “recovery” still falls short in exactly the place where it is most needed. The downshift in 2012 has never been closed, even in light of the last two month’s increases (which may yet be revised away).

This is an important clue about the economy as it exists rather than the idealized version being courted by perpetual monetarism. Despite better outcomes in the middle of 2014 (unfortunately, 2013 showed the same exact pattern without eventual fulfillment) there is “something” holding back full economic embrace. In reality, from the perspective of a real recovery with full productive potential (capex) leading the way, June and July would actually be recorded as baleful disappointments, as instead of a six-month average of about 5.5% there “should” be consistent growth not just in double digits but likely closer to 15%. For a brief time between early 2011 and February 2012, that actually looked almost attainable. Then “something” changed course and now double digits are nothing but memories, and simple positive numbers take their place.

We can only speculate counterfactuals as to what the economic trajectory, especially for wages and earned income, might have looked like if so many companies had not gained so much interest in financialism. So what appears to some as getting better is actually a system degrading itself in pursuit of “demand” driven by whatever form of redistribution the central banks can stir up.

 

 

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