Corporate Profits & Capital Spending

Profits drive business cash flows and those flows plus the raising of additional funds help
drive capital spending. S&P 500 profits momentum has been very sluggish over the
past two years on modest physical volume growth and the erosion of pricing power.
With more sharply limited cash flow growth, managements have become more reluctant
to upgrade extant facilities and start new ones. Instead, there has been greater executive
suite interest in buying in stock to bolster earnings. The order book for civilian capital
goods excluding aircraft has turned down again. New Orders

Following a lengthy period of capacity growth in the 1990s, the bookend recessions for
the prior decade have left the monthly order book for basic capital goods no higher than
it was in the year 2000. Normal life depreciation measures tell you that companies are
managing more and more with aging facilities and are squeezing the labor force hard to
extract efficiencies and force workers to accept slight compensation gains in a still slack
labor market.

The recent developments of a selling / price cost squeeze and reduced productivity have
darkened the outlook for capital goods.