As go profits, so goes business spending. The recent stall in S&P 500 forward earnings isn't a good omen for new factory orders, which have already stalled this year. Profitable companies expand their capacity by spending more on plant and equipment, while unprofitable companies scramble to cut their costs by reducing their capital outlays. In the real GDP accounts, the pace of capital spending has been slowing. It rose 5.3% (seasonally adjusted annual rate) during Q2 following a gain of 7.5% during Q1. Last year, such spending increased 8.6%.
The recent stall in orders is widespread. Orders for machinery look especially toppy, led by recent weakness in construction machinery, farm machinery and mining, oilfield & gas machinery. The slowdown in the growth rates of major emerging economies is depressing demand for construction machinery. The severe drought in the U.S. is bad for farm incomes and outlays on farm equipment. The glut of natural gas is depressing the demand for rigs.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.