Capital Spending

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 so far this year. Profitable companies expand their capacity by spending more on plant and equipment. 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% (saar) 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 US is bad for farm incomes and outlays on farm equipment. The glut of natural gas is depressing the demand for rigs.

Today's Morning Briefing: ECB’s New Mandate. (1) The mandate question. (2) Draghi is focusing on spreads. (3) Hurry up, and drag your feet. (4) At WIT's end? (5) Less than zero IOER? (6) S&P 500 earnings expectations down across-the-board. (7) Energy and Materials estimates especially weak. (8) SMidCaps outpacing LargeCaps forward earnings. (9) Not-so-durable goods orders. (More for subscribers.)