Companies Are Reducing Their Investment In The Future
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ValueSide
 February 28 2023
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    American Business People are, generally speaking, optimists. They're always looking for a brighter future, often looking beyond the valley for better times. But not this year.


    While this upbeat attitude is admirable and essential to guide us through callous times, it presents an issue for economists. There seems to be a growing consensus among many in the "dismal" science that the nation will see negative economic growth later this year. The primary puzzle for most economists is whether the country is slipping into recession.


    But determining whether a Recession is in our future requires some unbiased measures of the state of American Business.—something objective and not influenced by Private Businesses' tendency to be overly upbeat.


    Generally, we'd prefer to watch how the business behaves rather than what the firm says. Actual business behavior, when the Financial Officer commits to spending the company's money, is the best measure of the future course of that business.


    We don't have many indicators like that, but yesterday one such report was published, and its results were stunning.


    The US Census Bureau published its latest report on Durable Goods. Now Durable Goods are considered anything that has a usable life of 3 years or more. You'll find a lot of durable goods in the equipment that companies purchase. The latest office equipment, computer, or manufacturing device. Anything that the company expects to have around for a while, something that will last for years.


    If a CEO sees challenging times ahead, they likely won't invest in durable assets. These are usually "big-ticket" items, and a couple of corporate officers often have to approve the expenditure. This willingness to spend big is significant because it takes a certain amount of optimism in the future to write a six or seven-figure check to make that investment.


    On the other hand, if the business is expanding and adding a new "widget maker" will get more sales, the CEO will buy it.


    And when economists see that Durable Goods orders are climbing (one of the best overall measures of business investment), it says that businesses are putting their money on the line, betting that the future is bright. They are looking for economic expansion in the country.


    You may have seen the headlines yesterday. Durable Goods were down 4% for January. In itself not good news, but that's only half of it. By far the worst performance for Durable Goods since the Pandemic, and this report followed a strong December, which saw an increase of more than 5% in Durable goods. So January was a huge drop, and entirely unexpected after December's strength. It was a trend reversal. While one month does not make a trend, that's a feeble way to begin the new year.


    January often sets the tone for the entire year. To begin the year this way suggests that companies see 2023 as much weaker than 2022, potentially scaling down for a weak year ahead. At the same time, December may have just resulted from companies spending extra cash to lower tax liability.


    We discussed how such market leaders as Walmart and Amazon are lowering expectations for the new year. Moderna, as we discussed last week, is also reducing its guidance. At the same time, even market leader Apple Computer has serious supply chain issues that may limit its profit growth in the coming year.


    Both sides in the War in Ukraine continue to grow more bellicose. The Collective West, in particular, continued to provide more strategic and military aid to President Zelensky and his army.


    The United States has been at the forefront of this push, having spent well over $100 billion in current and future stock of munitions and equipment. The Defense Industry is the only economic sector that will grow significantly. Ukraine alone promises to keep the Military Industrial Complex busy for months.


    In reporting on the Durable Goods Orders, the Census Bureau also provided data on Capital Goods. Non-defense capital goods declined in January by 15%. Those Trucks, Ships, Planes, and large machinery that are so massive they can be capitalized and financed independently. Underscoring yet again that defense spending is one of the only bright spots in capital spending.


    The bottom line, 2023 needs to get off to a better start. Granted, this is only one month's report. Still, there is a critical reluctance on the part of Corporate America to invest in their future by purchasing durable and capital goods.



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