Falling capgoods orders show that US profits are fragile
US durable goods orders fell by 3% in March and nondefense capital goods ex-aircraft fell by 2.5%, indicating that investment will continue negative into the first quarter. Nonresidential private fixed investment fell at a 2.1% annual rate during the fourth quarter of 2015.
Adjusted for inflation, monthly orders for new nondefense capital goods are 13% lower than in 2007 and 20% lower than in 2000.
The fall in capital investment corresponds to a decline in productivity growth. Output per manhour for the nonfarm business sector in the United States is almost flat, the first time this has occurred since the stagflation of the 1970s. The chart below shows five-year productivity growth (annualized).
The United States is adding low-wage, labor-intensive employment in health care and fast food and losing manufacturing and mining jobs. Falling oil prices and declining investment in shale oil and gas account for only a small part of the problem; this is reflected mainly in declining orders for construction and oilfield machinery.
The drop in capital goods orders and the collapse of productivity growth reflect changes in the composition of the US workforce. America now has almost as many people employed in leisure and hospitality as it does in manufacturing. In 2000, it had half as many. In 2000, America still had more employees in manufacturing than it did in health and education services. Now it has half as many.
Falling employment in capital-intensive industries is one explanation for the 20% decline in inflation-adjusted capgoods orders over the past 15 years. Another is declining US market share globally. And another possible explanation is that US businesses may not be replacing their existing capital stock.
Commerce Department data show a widening gap between US corporate profits adjusted for capital consumption and unadjusted for capital consumption. That might be a quirk of the government’s depreciation models, but it also might reflect underreporting of depreciation by US businesses.
Corporate profits have been falling, mainly due to the poor performance of the energy sector. But the decline in profits might be much worse than S&P 500 companies are willing to admit. The Commerce Department’s measure of corporate profits after taking into account capital consumption is now lower than it was in 2011, and about 15% lower than the unadjusted measure.
If US companies have underreported depreciation in order to brush up their bottom lines, corporate profits may be more vulnerable to decline than the stock market appears to believe. The data firm Factset notes that “the final number of companies issuing negative EPS guidance for the quarter, it will mark the second highest number of companies issuing negative EPS guidance for a quarter since FactSet began tracking guidance data in 2006.”
The increase in negative earnings guidance is concentrated in Information Technology (25), Consumer Discretionary (18), and Health Care (17), Factset reports. have the highest number of companies issuing negative EPS guidance for the first quarter. An unusually large number of Healthcare companies have issued negative guidance as well.