Economists aren’t sure why capital spending is slowing, but they fret that the downturn may signal a coming recession, according to CNBC's senior economics correspondent Steve Liesman.
“It bothers me whenever I see capital expenditures slowing because, historically, it’s been such a critical part of the economy,” Maury Harris, chief economist at UBS, told Liesman. “This is happening at the same time that we have an on-going housing recession. I think it raises some red flags on the economy.”
The decline in capital spending comes as corporate interest rates are low and S&P 500 companies have about $600 billion in cash, Liesman said.
Last year, the level of share buybacks was close to the level of capital spending, Liesman said. Companies apparently decided they could get more bang for their buck by buying back stock than by purchasing new equipment, he said. Critics say such short-term spending will hurt the economy in the future.
Many believed capital spending by business would offset weakness in the housing and auto sectors, allowing what some have called the “Goldilocks economy” to continue.
But business spending on equipment and software declined in two of the last three quarters. Preliminary data suggest it’s likely to decline in the first quarter of 2007.
Economists say it’s rare to have consecutive quarterly declines in business spending that don’t precede or coincide with a recession, Liesman said.
Even Federal Reserve Chairman Ben Bernanke weighed in on capital spending during a recent appearance before Congress.
“Much of the weakness in recent months has been in types of capital goods used heavily by the construction and motor vehicle industries,” Bernanke said. “But we’ve seen some softening in demand for other types of capital goods as well.”
Most economists still look for the economy to rebound in the second half of the year, Liesman said But that rebound could be in doubt if capital spending doesn’t come back as well.