NEWS / Foreign Exchange

U.S: Bad news on corporate spending too?

• Non-defence capital goods orders - a proxy for US business spending - have been slowing markedly in recent months. Given the strong fundamentals in place, i.e. high capacity utilisation, low spending levels and easy financing conditions, recent developments seem surprisingly soft.
• We find that some of the softness in capital goods orders is attributable to the decline in business confidence, i.e. ISM index. Contrary to conventional wisdom - and quite surprisingly - a simple regression reveals that capacity utilisation, interest rates and profits are not able to explain business spending.
• Instead, we find evidence that the stock market, inflation and ISM employment are able to capture future swings in business spending fairly well. These factors signal that business spending will pick up during H1, although to a slightly slower pace than earlier. An improvement in business spending is further supported by our expectation of a recovery in the ISM index in 2007.