US Capital Goods
Fundamentals Update as at 27 November 2013 by Lorenzo Beriozza
New orders of capital goods have not progressed at all in 2013. Both orders and shipments reached their peak at the start of the year and since then have gone sideways. Moreover, after factoring in the speed bump that orders and shipments experienced surrounding the US presidential elections in 2012 (and the height of the Eurozone recession), capital goods orders and shipments have barely progressed in the past two years.
One explanation is to cite political events that have weighed on corporate America – and probably deterred capital spending. Political uncertainty surrounding the government shutdown this year and the Presidential election in 2012 are the two factors that are most frequently pointed to in order to explain weak demand for capital goods.
Made in the USA no longer means staying in the USA – at least not for capital goods. While weak domestic orders have definitely impeded goods shipments, the combination of weak US demand, strong (and more sophisticated) global growth, and the weak USD have made foreign demand for capital goods into an increasingly important component of demand for US manufactured capital goods. The share of US-made capital goods that are exported has risen from around 45% pre-crisis to 55% today. Global demand drives orders of US capital goods more than domestic demand. The global economy has also been fairly weak and global demand for capital goods has softened. Seeing as the majority of US manufactured capital goods are for export, global growth will really matter for the order book – and global growth has been slowing down. Nominal capital goods exports didn’t decrease surrounding the presidential election, but did flat-line in 2011 as Europe entered faint recession. A recent uptick in capital goods exports coincided with Europe’s exit from recession.
The bottom line is that the domestic US economy still has not picked up its demand for capital goods – domestic demand is still below pre-crisis levels. The hope is that domestic US demand for capital goods will increase as the financial crisis gets to be further in the rear-view mirror. The other ray of sunlight is that Europe has exited its recession, although one wonders how robust European demand for US capital goods will be. The major source of concern is that much of the emerging markets demand that was in place from 2009-2012 (and which receded in 2013) is likely to continue to slow, particularly as US manufactures become comparatively more expensive if the USD appreciates over the next 12 months. US capital goods manufacturers will be relying on that so-far elusive uptick in US capital goods demand more than ever.
Source: Scotiabank
