There are new signs that businesses are pulling back on their investment spending in advance of the looming austerity crisis. And that's the good news.
Shipments of core capital goods, a measure that excludes defense spending and aircraft -- a common measure of business investment -- fell 0.4 percent in October, the Commerce Department said Tuesday. There is an obvious and likely explanation: Firms were becoming all the more wary of what might happen with the "fiscal cliff," the wave of tax hikes and spending cuts scheduled to take effect on Jan. 1 absent a new agreement. If you are a corporate executive weighing the purchase of a piece of industrial equipment or a truck for your delivery fleet, you may well decide "I'll just wait to see how all this shakes out."
Even if you think it unlikely that the United States will go over the cliff -- that ultimately Congress and President Obama will strike a deal that averts the immediate onset of fiscal austerity -- even a relatively small risk of an impasse prompting a recession, say 20 or 30 percent, is reason enough to delay long-term investment spending.
A number of executives of major companies have suggested exactly that mentality. "There's a slowdown in government spending, there's uncertainty over tax policy, and real concerns over the fiscal cliff," said John Stephens, the chief financial officer of AT&T, in a conference call with analysts last month. "So overall, just a lot of uncertainty clouding business decisions."
Ironically, that's one of the best hopes for the economy: We're better off if it is fiscal cliff fears dragging down investment spending, not something more fundamental. Because that would imply a nice bounce back early in 2013 amid pent-up demand once Congress and President Obama strike a deal. The executive who didn't buy that machine or truck in October 2012 might instead do so in January or February of 2013, creating a nice bounce for overall growth.
But there is reason to fear that there is more holding back business investment spending than simply austerity fears. A slowing in business spending took effect long before the term "fiscal cliff" had even been coined. In the fourth quarter of 2011, business spending on equipment an software rose at an 18.3 percent annual rate, but the growth rate has fallen every quarter since then -- including to zero in the third quarter of 2012. Another indicator out Tuesday, the Equipment Leasing and Finance Association's index of activity in the business equipment leasing sector, fell 7 percent in October (activity was still up sharply compared with year earlier, however).
There are a number of factors in the slowdown, including a recessionary economy in Europe and slower growth in China and elsewhere in the developing world, both of which have put downward pressure on exports.
Federal Reserve Chairman Ben Bernanke said last week that 2013 could be a "very good year" if the fiscal cliff fears are addressed constructively. There is something to that forecast: Housing is already recovering and is poised to add meaningfully to growth in 2013 for the first time in seven years. Consumers have made considerable progress in paying down debts and righting their balance sheets, so their spending is poised to remain steady or rise further. State and local governments are largely through with their steep cutbacks in spending, which has been a drag on growth since 2010.
In other words, the stars would seem to be aligned for a pretty good year, as Bernanke suggested. But all that assumes that business spending isn't poised to become a drag on the economy, counteracting some of those positives. For that to be the case, it would be a great help if the falloff in the corporate sector is overwhelmingly a creation of government uncertainty, and not something more fundamental.
Already there are some positive signs that offer some hope that business investment is not collapsing, even with the fiscal cliff risks. While core capital goods shipments were down in October, orders for nondefense capital goods excluding aircraft were up 1.7 percent, reversing weakness in the previous couple of months. The great hope for 2013 is that this is a better indication of the underlying optimism at the nation's major businesses than the tone of gloom and worry that hung over the last earnings season.