Fall 2016 issue of Horizons

FEATURE | The State of Our Economy

When we look at the level of capital investment, we feel a bit happier. When there is too much unused capacity, the desire to buy machinery or hire is reduced and now we are seeing that businesses are investing more than in the past. The business community is still reported to be worried and cautious, but the fears about Brexit have faded somewhat and there is slightly less apprehension about the coming election. The lending environment remains strained as banks are pulled between their desire to loan and the regulatory pressure to reduce risks. The durable goods numbers have not been unduly affected by the aerospace sector this year although there is some caution from month to month. A good sales period for Boeing will make the durable goods numbers look awfully good and then the next month they can look awful as the sales taper off. The general equipment part of the durable goods data looks stronger than it has been. This has not been the story as far as factory orders are concerned as these are mostly consumer goods as opposed to the longer lasting industrial goods. The import numbers can make this a volatile sector as there are many substitute goods coming into the U.S. via imports that can cut into demand for domestic output. The strength of the dollar has meant that imports into the U.S. are as cheap as they have been in years but it also means that exports are harder to market. The latest data from the Credit Managers’ Index (CMI) is stronger but with cautionary notes. The growth has all been in the favorable categories like sales, applications for credit, dollar collections and amount of credit extended. There is still a lot of trouble in categories like collection activity, disputes, slow pays and bankruptcies. It is positive, but with caveats.

The metals that are watched the most closely are steel, copper, aluminum and to some degree, nickel (as far as steel use is concerned). The aluminum demand is up as aerospace has been a growing sector but copper has been languishing with a slump in demand from telecom. The best news this month comes from the interconnected trio of capacity utilization, capital investment and durable goods delivery. The rate of utilization seems to have stopped declining at about the mid-70s. This is still far below the ideal of between 80.0% and 85.0%, but the stabilization is a good sign. The sweet spot as far as capacity utilization is concerned is between 80.0% and 85.0% because when usage is below 80.0% there is slack enough to halt hiring or capital investment. Companies seek to wait until there is a solid demand before they pull the trigger on more people or machines. Once utilization creeps over 85.0%, there start to be shortages and bottlenecks and business is often slow to add capacity until they feel certain this is a trend on which they can depend.

page 8 | horizons Fall 2016