US Capital Spending

Capital spending new orders excluding defense and aircraft took big hits in the prior two recessions
but are once again in fairly strong recovery mode. Moreover, new orders have broken out to a new
high this year. New Order

The recovery track for capex orders is about 10% per off the 2009 cycle low and has accelerated
recently as higher business sector earnings are boosting cash flow. Companies have even cut back
some on share buybacks to support a higher level of spending. System capacity growth has been
recovering slowly after experiencing a rare decline over 2009 - 10, and reached +2.6% yr/yr just
recently. Capacity growth still lags output growth, but balance is slowly returning to the system
and this development acts as a damper on any cyclical acceleration of inflation.

The chart above shows that new order rates were volatile and basically range bound until very
recently. The US has not experienced a strong capex cycle since the late 1990s and has been
running on older, outdated equipment and plant. There has been a strong recovery off the
recession trough despite the extant slack in the system as companies move to modernize after
a long hiatus.

Capital goods stocks and related industrial service issues have lost ground in relative strength
against the SP 500 this year as investors have shied away in lieu of the closing out of the Fed's
QE 3 program. Understandable, but if the economy does not slow down as much as expected,
the group will retain interest because of business's need to continue to upgrade and modernize.
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