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March 19, 2018

The Fed is Hogging the Attention, but don’t Forget this Critical Number for the Economy

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Business investment has sped up, but companies need to accelerate investment even faster to help the U.S. economy keep the good times going.

If the Federal Reserve’s big get-together is a must-see event for Wall Street this week, the latest look at business investment is the undercard.

The Fed is widely expected to raise a key interest rate that helps set the cost of borrowing for companies and consumers — business startup loans, mortgages and so forth. The central bank wants to make sure a growing economy and the tightest jobs market in years doesn’t lead to higher inflation.

A more aggressive Fed isn’t good for stocks DJIA, SPX. What could help keep inflation — and the Fed — at bay is higher business investment — the missing link for the U.S. economy since a recovery from the Great Recession began in mid-2009.

The unemployment rate is already at a 17-year low and it’s likely to drop below 4% in the coming months. Companies are complaining loudly about growing shortages of skilled workers and it’s just going to get worse.

Now firms have two choices. Increase pay to win over new workers in a highly competitive jobs market, a potential source of inflation. Or invest more money in computers and other equipment to help current employees produce more goods and services in the same amount of time.

It’s called higher productivity — and it allows businesses to boost worker pay without hurting profits.

Business investment has lagged behind the historic norm during the current expansion. One closely followed measure of investment, known as core capital-goods orders, headed south in late 2014 and didn’t turn positive again until the end of 2016.

The yearly pace of business investment sped up shortly after former businessman Donald Trump was elected in 2016, giving hope that a long-awaited rebound was here to stay. The 12-month rate of investment surged to almost 10% last October to mark a five-year high.

Investment has tapered off recently to a yearly rate of 6.3%, with lower readings in January and December reflecting the first back-to-back declines since early 2016. Yet there’s good reason to believe core orders will resume an upward trajectory, starting with the February report.

The recent Trump tax cuts, for example, offered a slew of attractive incentives for immediate investment and corporations are now paying the lowest rates since the late 1980s.

Much of the savings appears to be going to stock buybacks and dividends, but companies big and small indicate they plan to invest more.

The Business Roundtable, for example, said last week that a survey of CEOs at America’s largest companies such as General Motors GM and Walmart WMT, hit the highest level since the poll was first undertaken in 2002. Many executives also said the planned to increase investment in the next six months.

A similar survey by the National Federation of Independent Business also found that small businesses were the most optimistic in 30 years.

“Core orders have started to slow after surging at the end of last year, but the latest business surveys point to a renewed acceleration soon,” economists at Capital Economics wrote.

All the happy talk won’t amount to much, though, if executives don’t follow up words with action. So pay close attention to core orders in the broader monthly report on durable goods.

It doesn’t get the same attention as Fed meetings, but it’s also a must-see event this year.

Article originally published by Jeffry Bartash at