Surging Business Sentiment May Actually Matter This Time Around

  • Regional Fed surveys show capital spending intentions rising
  • Morgan Stanley index climbs to level not seen since 2011

Doll: Growth Will Bring Consumer Along for the Ride

Animal spirits are about to get physical, kicking off the next phase of the U.S. expansion.

Business investment and productivity growth typically go hand in hand -- and they’ve both been largely absent during the nation’s economic recovery from the financial crisis.

Residential and non-residential investment both made positive contributions to GDP growth in the fourth quarter -- the first time that’s happened in more than a year -- but Federal Reserve policy makers judged there to be more room to run for business fixed investment in Wednesday’s statement.

And Ellen Zentner, Morgan Stanley’s chief U.S. economist, offers cause to believe the broad pickup in measures of business and consumer sentiment following the election, which was highlighted by the Fed in its communique, will actually bear fruit and translate into an increase in activity this time around.

"Our composite Capex Plans Index climbed an additional 3.7 points to 22.8 in January for a total post-election gain of more than 10 points, matching readings not seen since 2011," she wrote. "Further gains in equipment investment should follow."

Rising investment should buoy U.S. activity through mid-2017 based on this increase in capital spending plans, according to the economist.

Morgan Stanley’s index is derived by compiling capital spending plans from surveys performed by regional Fed banks, and weighting the results based on the district’s population, and tends to lead investment by about three months.

There is still room for caution. The annual performance of the index paints a more sobering picture. After rebounding following the 2008-09 recession, the index peaked at an average reading of 20 in 2014 and has declined in the two years since. Uncertainty surrounding the tax policies of the new administration may prompt businesses to hold off on capital spending until the fog begins to clear.

"It appears that capex plans have turned a corner and, if sustained, could put in the best year of performance since 2007," concludes Zentner. "Recent strength in core capital goods orders -- up 0.8 percent in December following an upwardly revised 1.5 percent gain in November -- points to a broader improvement starting to take hold, and given the lead-time in capex plans we would expect this gain to be extended."

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