Capital Spending: Santa:

The U.S. capital goods sector is a bellwether industry, and some industries are actually growing.

Everyone is always a bit cheered by the holiday boosts in consumer spending, but let’s face the real Santa facts: The economy delivers real and lasting economic success when industry buys tools and trucks, not when we buy toys and hot toddies. Sounds like the Grinch?

According to Standard and Poor’s, a substantial recovery in capital goods may be in full swing starting in early 2003. “Our current estimate of the recovery of the U. S. capital goods sector is for improvement starting in the first half of 2003, gaining momentum in the second half of the year,” said their credit analyst Robert Schulz.

Other research outfits and companies have been making similar predictions about the American industrial outlook. Some note the recovery is continuing, even with the uncertain international situation in the Middle East, and that a successful relaxation of tensions in that area will ratchet up predictions and performance in our economy.

Meanwhile, the country’s manufacturers are managing a cautiously optimistic game. While machine tool consumption this last September was up an encouraging 45 percent from August, it was a decline of nearly 33 percent from 2001’s total for the month of September, the Association for Manufacturing Technology (AMT) reported.

“Although up 45 percent from August, September’s activity signals a delay in an investment-led recovery in this market,” said Don F. Carlson, AMT president. The whole year of 2002 is headed toward a decline in consumption compared to 2001 of about 30 percent, AMT noted. The whole industry, or at least that sizable portion of it that claims AMT membership, is small in terms of the total economy. It is a bellwether industry, however, and the few billion spent on such equipment every year translates into increased productivity and higher quality for all of industry. Similarly, for capital goods of all kinds, their purchase is industrial management’s vote in favor of the future.

But some companies are looking for more definitive signs, added Standard & Poor’s Dan DiSenso. “The economy is not growing fast enough or generating enough confidence to trigger a capital goods buying cycle. If the general economy were to grow 3 percent or 4 percent next year, I think it would trigger one. But if the economy grows by only 1 percent or 2 percent, companies are going to be more cautious,” he added.

Another number of special significance in terms of the economy’s future is the factory utilization level. When plant capacity drops below 80 percent, the expectations are not great for capital goods. In the waning months of this year, the factory figures in terms of use have hovered around 76 percent to 77 percent.

All in all, it’s a picture of uncertainty and yet one of strength as well. “How’s that?” you ask. Well, there are other numbers. Try these: The U.S. economy still turns out $10 trillion a year in goods and services. Several states have GSPs higher than all but a few countries. Our manufacturing productivity growth, in some sectors as high as 5 percent, is perhaps the real key number. It continues to amaze even me as it demonstrates what all those previous years of capital spending have done for American industry. Productivity, after all, is the real Santa Claus. And quite a few industrial sectors are actually growing: rubber, plastics, textiles and fabricated metals, to name a few.

Finally, there’s a number that is so huge I can’t quite find a word for it. That’s the number that sums up the good sense and hard work of millions of Americans in industry and related businesses throughout the years. The results of that free enterprise spirit have kept the world looking our way for generations.

Capital spending will probably continue to rise over the next several months because it makes good business sense. Santa will be here on time for the kids — of all ages.

George Weimer, contributing editor, [email protected]

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