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Business Capital Spending: A True Economic Indicator

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I’m Gregory Miller. I’m Chief Economist for SunTrust Bank. I’ve been with the bank for 25 years. All economies have certain sectors which lead all the other activities, and other sectors which respond or lag to the leading indicators.

 

In the U.S. economy, that leading indicator is business capital spending. Businesses begin to increase their spending even while a downturn is still underway. They will recognize lower prices as an opportunity to purchase new goods and services that will help them expand for the later parts of the cycle. So, we observe, over time, that business begins to ramp up its operation even when the rest of the economy, the lagging sectors of the economy, are still in malaise and waiting for a kick-start.

 

Sequencing and drivers are both essential elements on the way the economy cycles. Observers, households and businesses listen to big-ticket data releases as if all events are happening simultaneously, when the truth is, one event, often, sets off a series of following events that develop into a discernible cycle for the economy. And without that initial kick-off event, the rest of the economy tends to stagnate.

 

If we concentrate on the large elements, like the labor market or like consumer spending, then most of the important driving mechanisms have already gotten in gear and are already operating. The consumer and the labor market are lagging events, which only operate in response to what happens in business spending.

 

There are some business capital spending indicators in public data. Measures of the strength of business capital spending are available in the gross domestic product accounts. We also have data series that measure business investment activity, as well.

 

If we step back from there, we can also watch the activity of the stock market, where investors anticipate businesses moving in their constant search for new growth and new profits. So watching the stock market earning reports and profits reports also help to anticipate the way that business is going to move with their capital spending.

 

The housing market, as well, tends to be one of our stronger leading indicators. Housing begins to correct itself on the production side—the building side of housing starts well in anticipation of an upturn in the economy so that builders are prepared with new product even before purchasers are aware that they want to buy it.

 

The business sector is something of a fuse that catalyses the rest of the economy. Business investment in new equipment and business expansion is the flame that lights the fuse that sets off the economy to sustainable growth.

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Gregory Miller, SunTrust Bank’s Chief Economist, explains how economies have certain sectors which lead all the other activities.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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