A Capital Spending Boom?

My former colleague, Alliance Bernstein U.S. Economist Joe Carson's current Perspectives bulletin notes some interesting harbingers of a U.S. economic recovery that will look different from previous recoveries in our business cycle history.

In previous cycles over the past fifty years, the annualized rate of recovery in real GDP six quarters after the cycle trough has been about 5.5%, of which 3.6% came from recoveries in housing and in personal consumption expenditures. ("New Mix Growth Story is Intact, 1/21/2011) Growth in investment and exports generated 1.9% annualized on average.

The current upturn's rate is 5.1%, which is comparable to the historical average, but the composition of contributors to growth is quite different, according to Carson's analysis. In the current upturn, 3.2% at an annualized rate over six quarters is coming from investment and exports, more than double the historical average rate. This is quite striking.

U.S. merchandise exports are going to emerging markets, versus a declining trend of export shipments to developed markets. "In our view, U.S. manufacturers will increasingly realize that they must upgrade their aging capital stock to maintain their competitive edge globally and boost production." This is music to our ears! Less financial engineering and more fundamental investment with the huge cash hoard of Corporate America.

He cites examples of Union Pacific Railroad, Intel and Ford Motor, all of which have publicly announced plans to increase capital spending by 25% in their network, build a new fab in Oregon, and build a new transit van plant in Missouri, respectively.

What if we were to scrap the current tax system: simplify it, get rid of outmoded deductions, lower rates and broaden the base? Add these and other fundamental improvements, like training our workforce, and you have a real reason for stock market valuations to start higher.