Spending on capital equipment is expected to slow down next year, according to many economy watchers. Rising interest rates, pricy oil, and some easing in economic growth are the popular reasons given for why businesses won't keep spending at the recent clip.
Another issue will be the bonus depreciation provision. The temporary tax provision let businesses immediately write off 50% of the purchase price on most capital goods, such as computers, vehicles, or factory equipment. The provision sunsets at the end of 2004. If Corporate America has taken full advantage of the law, then some investment spending for 2005 was probably pulled forward.
The latest data could show some early signs of any shift. Looking at nondefense capital-equipment shipments less aircraft, a sort of core capital investment measure, fourth-quarter shipments are on track for their smallest gain since the final period in 2002.
One way to gauge business confidence for the future is looking at new orders. If companies don't believe prospects will remain positive, then new orders are likely to dry up. According to the median forecasts of economists surveyed by Action Economics, factory orders are expected to have increased by 0.9% in November, following a 0.5% gain October. Even so, looking at the core measure of capital goods orders, the final quarter is currently on pace for an annualized increase of 5%, the smallest gain since the first quarter of 2003.
There are reasons to believe only a mild slowdown in business spending, if any, should occur. When it comes to running a business, capital and labor are the two primary ingredients. During this economic recovery, companies have shown a preference towards investing in capital equipment. Minimal pricing power and stiff competition from abroad have driven businesses to strive for increased efficiency and productivity. With labor costs, especially health benefits, rising faster than inflation, Corporate America has been more cautious about hiring workers.
What's more, the Federal Reserve's annual revisions show that capacity utilization is running higher than previously thought. The November industrial production report showed a capacity utilization rate of 77.6%. That rate was upped to 78.7%. While still below the long-term average of 81.1%, the higher rate means there's less excess capacity floating around the economy. Even with real gross domestic product growth around 3.5% expected in 2005, vs. a rate above 4% this year, more businesses will need to add some capacity.
Keeping an eye on the key numbers mentioned is a good way judge how capital spending will play out in 2005. The Institute for Supply Management's business activity reports also provides insight into what companies are thinking, and the GDP report shows business spending.
Here's the economic calendar.
MEETING OF NOTE
Monday, Jan. 3, 12 p.m. EST
Federal Reserve Bank of Richmond President Jeffrey Lacker addresses the North Carolina Bankers Association in Raleigh, N.C.
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Monday, Jan. 3, 10 a.m. EST
The Institute for Supply Management's December index of industrial activity is expected to have edged a little higher. The consensus among economists surveyed by Action Economics is for a reading of 58%. The November index rose to 57.8%, from 56.8% in October, but remained below all prior readings for 2004. Even so, the November level has historically corresponded with an average annualized quarterly increase of 5.5% in gross domestic product. While such an increase is not expected for the fourth quarter, it indicates that manufacturing activity remains pretty robust.
There was some deceleration in production, with the November index coming in at 57%, from 58.9% in October, and 61.6% in September. However, the pace of growth in new orders quickened, with the index jumping to 61.5%, from 58.3% in October, and 58.1% in September.
At the same time, respondents are working off backlogged orders. The November index of unfilled orders stood at 47.5%, from 49% in October, and 55% in both September and August. A reading below 50% indicates that the overall level of unfilled orders has fallen. If the trend persists, new orders will have to remain strong in order to keep manufacturers as busy as they are now.
Monday, Jan. 3, 10 a.m. EST
Construction spending is expected to have improved. The median forecast by economists surveyed by Action Economics is for a 0.5% increase during November. In October, outlays were unchanged, after inching up by 0.1% September, and a 0.3% gain in September.
Spending on private single-family homes softened a little more in October, with a second straight monthly decline of 0.3%. The private residential sector makes up 37% of total construction outlays. At the same time, government outlays rose 1.2%, led by a 6.4% surge in highway and street spending.
Companies have also reigned in money for building. Construction spending on office space fell for a fourth consecutive month in October, while money for constructing commercial space slipped for a second straight month.
Tuesday, Jan. 4
Sales of domestic and imported cars and light trucks during December probably rose to an annual pace of 16.8 million vehicles, according to Ward's Automotive Reports. That would be a mildly better rate than the 16.4 million in November, but still under the 17 million pace of October and the 17.5 million in September.
Expectations for early 2005 aren't too upbeat. American automakers are holding large levels of inventories and Ward's believe sales will remain flat. Such a scenario points to further incentives by the automakers in order to trim inventories.
ICSC-UBS STORE SALES
Tuesday, Jan. 4, 7:45 a.m. EST
This weekly tracking of retail sales, assembled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ending Jan. 1. In the week ended Dec. 25, seasonally adjusted sales pick up, tallying a 2.7% gain, after a weekly increase of 1.6% over the previous period following a 1.2% rise for the week ended Dec. 11.
The Christmas shopping season closed with a bang and retailers believe post-holiday sales could be strong. Gift-card sales did better than expected this holiday season and retailers will begin to reap the benefits when consumers start using the cards to purchase items. Retailers can't claim any sales from a gift cards until it is used to buy other goods or services.
INSTINET REDBOOK RESEARCH STORE SALES
Tuesday, Jan. 4, 8:55 a.m. EST
This weekly measure of retail activity will report on sales for the fifth and final fiscal week of December, ending Jan. 1. Over the first four weeks of December, ended Dec. 25, sales were off by 0.4%. Comparing the first three weeks in December to the same period in November, sales were down 0.7%. For the full month of November, sales were down 0.5% from October.
MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS
Tuesday, Jan. 4, 10 a.m. EST
Factory orders likely posted another solid increase in November, say economists surveyed by Action Economics. The median forecast is for a 1% gain in November. Orders grew 0.5% during October, after holding steady in September and a 0.3% retreat over August.
Published data on new orders for durable goods showed a 1.6% rise, although the increase was driven by a 64.3% surge in nondefense aircraft orders. Jet orders are volatile and clumpy and can distort the overall monthly tally. Outside of the transportation sector, orders were off 0.8%. One bright spot was the nondefense capital-goods category excluding aircraft. This core measure of capital spending on durable goods showed a 1.8% jump in November.
Wednesday, Jan. 5
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Wednesday, Jan. 5, 7 a.m. EST
The Mortgage Bankers Association releases its tally of mortgage applications for both home buying and refinancing for the week ending Dec. 31. In the week ended Dec. 24, the purchase index moved up to 483.8, after slipping to 471.1 in the prior period, from 488.9 in the period ended Dec. 10. The latest reading of the four-week moving average reached 483.7, after nudging up to 477.8 over the week ended Dec. 17.
The average rate on a conventional 30-year mortgage, according to HSH Associates, rose to 5.83%, from to 5.77% in the period ended Dec. 17.
The refi index slid to 1803.9, after jumping to 1958.2 over the week ended Dec. 17, from to 1852.4 in the previous week. The gain couldn't prevent the four-week moving average from falling. In the week ended Dec. 24, the moving average was 1876.3, down from 1903.4 in the prior week, and 1958.7 over the period ended Dec. 10.
ISM NON-MANUFACTURING SURVEY
Wednesday, Jan. 5, 10 a.m. EST
The Institute for Supply Management releases its December index of business activity in the mostly services, non-manufacturing sector. The economists queried by Action Economics expect the index to remain virtually unchanged at 61.5%. For November, the headline reading climbed to 61.3%, from 59.8% in October, and 56.7% in September. The current reading is safely above the historical average of 57.2% since the inception of the index in 1997.
The new orders index remained strong with a November reading of 59.9%, after rising to 60.5% in October. In addition, inventories and unfilled orders grew at a faster clip according the latest data.
The employment index eased to 55%, from 55.8% in October, and 54.6% in September. Eleven industries covered by the ISM non-manufacturing survey reported increases in hiring, vs. four that said payrolls were trimmed and two reporting no change.
MEETING OF NOTE
Thursday, Jan. 6, 1 p.m. EST
Federal Reserve Bank of Kansas City President Thomas Hoenig discusses the U.S. economy with business leaders in Kansas City, Mo.
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Thursday, Jan. 6
The International Council of Shopping Centers will release its December same-store sales figures for major U.S. chain retailers. According to the latest weekly sales report by the ICSC, overall December sales most likely rose by 3% to 3.5% from a year ago. In November, sales were up just 1.7%, after a 4.1% gain in October and a 2.4% yearly increase in September.
After a lukewarm start, holiday shopping took off in the final week before Christmas. The late push put overall holiday season sales comfortably ahead of last year. What's more, there are reports that post-Christmas sales could be pretty good as well, especially with the rising popularity of gift cards. According to the National Retail Federation, the week after Christmas typically represents 10% of holiday sales.
Thursday, Jan. 6, 8:30 a.m. EST
First-time claims for jobless benefits for the week ended Jan. 1 probably moved up to 333,000. Jobless claims stood at 326,000 in the week ended Dec. 25, after hitting a downwardly revised level of 331,000 in the prior period.
The four-week moving average was 333,500, down from 339,500 in the week ended Dec. 18. During the week of Dec. 18, continuing jobless claims inched up to 2.76 million, from 2.73 million in the week ended Dec. 11.
MEETING OF NOTE
Friday, Dec. 7, 10:15 a.m. EST
Federal Reserve Bank of Philadelphia President Anthony Santomero, Federal Reserve Board Governor Ben S. Bernanke, and former Federal Reserve Governor Alan Blinder participate in a panel discussion on the transition from academia to policy-making. The panel discussion is part of the Allied Social Science Association's annual meeting in Philadelphia.
2:30 p.m. EST
Federal Reserve Board Vice Chairman Roger Ferguson speaks about productivity and job growth at the Allied Social Science Association's annual meeting in Philadelphia.
Friday, Dec. 7, 8:30 a.m. EST
Job growth most likely picked up a bit in December. The consensus among economists surveyed by Action Economics is for an increase of 180,000 in for the final month of 2004. In November, payrolls grew by a smaller-than-expected 112,000 on the heels of an October leap of 303,000. The forecast gain in December payrolls is unlikely to push the unemployment rate below the 5.4% level of November.
The latest forecast calls for factory payrolls to grow by just 3,000. Despite positive data regarding jobs in the national and regional factory activity reports, the Labor Dept. shows manufacturers shed workers in the prior three months. So far this year, total nonfarm payrolls have expanded by just over 2 million, while factory job gains have totaled just 76,000, despite manufacturing employment making up close to 11% of total nonfarm jobs.
Even with robust activity, the data shows manufacturers are still trying to limit employment gains and costs. Besides the minimal addition to factory payrolls, the average factory workweek has fallen from 41.1 hours in May, to 40.5 hours in November.
The average workweek probably moved back to 33.8 hours, after slipping to 33.7 hours in November, from 33.8 hours in both October and September. Meanwhile, gains in average hourly earnings are forecast to grow by 0.3%, following a 0.1% rise in the prior month and a 0.3% gain during October.
CONSUMER INSTALLMENT CREDIT
Friday, Jan.7, 3 p.m. EST
Consumers probably added $6 billion in debt during November. That is the median forecast among economists queried by Action Economics. Total credit outstanding grew by $7.7 billion in October, after a $13.6 billion jump in September, and a $2.8 billion increase in the prior month.
After all the holiday shopping is accounted for, 2004 will likely see the biggest gain in consumer-credit accumulation since 2001. A huge January increase of over $26 billion and an $11 billion surge in revolving credit during September greatly contributed to the yearly increase. Revolving credit is made up mostly of credit-card debt. Another year of healthy auto sales stoked by big incentives and low interest rates also fueled the gain in 2004.
Mehring is an economics editor for BusinessWeek in New York