Thursday, August 8, 2013

The Accelerator Effect (excerpt)

In economic theory, the “accelerator effect” is when an increase in national income results in a proportionately larger rise in investment. It tends to boost overall economic growth during expansions. Needless to say, it can work in reverse during recessions. A growing economy boosts corporate profits and cash flow, which tends to stimulate an expansion of the capital stock of the business sector.

One of the more encouraging accelerator relationships that I track is the close one between real capital spending in the GDP accounts and S&P 500 forward earnings. During the two previous business cycles they both rose to new record highs at the same time. This time, however, forward earnings has been rising into new high ground ever since early 2011, yet real capital outlays still are hovering near the previous cyclical peak.

The dramatic rebound in the M-PMI from 50.9 in June to 55.4 in July and in the NM-PMI 52.2 to 56.0 over the same period may be the triggers that boost capital spending to new highs in coming quarters. Our “Second Recovery” scenario seems to be playing out as pent-up demand for autos and houses is finally boosting economic activity. Another happy surprise is that US exports rose to a new record high during June.

Contributing to a possible capital spending boom might be a shortage of workers. Yes, I know that the unemployment rate is still very high at 7.4%. However, there is a shortage of knowledge workers, including those with basic manufacturing skills and work experience. The unemployment rate for workers with a college degree is only 3.8%. Businesses may have to rely increasingly on high-tech equipment and software to do the work.

Today's Morning Briefing: The Accelerator Effect. (1) The circle of life: GDP and profits drive capital spending, which drives GDP. (2) Hunkering down this time. (3) Lots of cash for dividends and buybacks. (4) Lots of pent-up demand for capital goods. (5) Forward earnings is bullish for Industrials. (6) A shortage of knowledgeable and experienced workers. (7) Capital goods output popping in Germany, the UK, and the US. (8) Overweight-rated Industrials are outperforming. (More for subscribers.)

No comments: