Historically, uptrends in durable goods orders and capital expenditure suggest stronger job growth ahead.
We follow the work of many economists and strategists, and among the best is the John Hook of Hook Analytics. We were recently pleased to see the following points of analysis from John about the correlation between durable goods orders and capex spending plans, and their correlation with job growth. His conclusions are bullish for job creation throughout the next two or three years. Stronger jobs growth will be correlated with stronger GDP growth, and as our readers know, stronger GDP growth leads to stronger corporate profits, while increasing corporate profits lead to higher stock prices.
First for some relevant comments from Hook Analytics.
“When Y/Y durable goods orders and capital expenditures have been in uptrend like now, 86% of the time since 1992 job growth has accelerated. Note that durable good orders and capex y/y percents are in strong uptrends. Note that the current uptrend in durable goods orders and capex Y/Y % is like the spurts in the 1990s and like the 2002–06 expansion. The Y/Y % uptrend is as strong and the Y/Y % level is as high as those prior expansions; 6 of 7 precedents are bullish. Overall 86% bullish. When corporations increase their rate of investment, like now, 86% of the time since 1992 they have increased hiring…”
Please refer to the charts below.
The first is a simple graph showing manufacturers’ new orders for durable goods:
Source: GIM, Federal Reserve Bank of St. Louis, Hook Analytics
Now, to emphasize the trend, the following graph shows the year-over-year growth of three things: manufacturers’ durable goods orders; manufacturers’ non-defense capital goods orders, excluding aircraft; and total non-farm payroll. The payroll data have been multiplied by 4 to put them on the same scale as the other two indicators. Note the correlation of these three data sets:
Source: GIM, Federal Reserve Bank of St. Louis
From the historical data, there are seven precedents where durable goods and capital expenditures are in this kind of strong, correlated uptrend.
Hook Analytics observes: “6 of 7 precedents are bullish: 1993, 1996, 2011, 1997, 1999, 2006.” One is bearish: 2007. 6 of 7 is 86 percent.
We do not need to tell our longer-term readers what this means to us. Rising capital spending and rising durable goods orders lead to rising GDP, unless interest rates are rising rapidly. Currently, interest rates are not rising rapidly, and short-term interest rates are staying much lower than intermediate and long-term rates. This is bullish for economic growth.
GDP growth is also positive, and we believe that Hook Analytics is correct — GDP growth will get more positive. It is our opinion that interest rates will rise somewhat, but that short-term rates will stay below long-term rates, and that will be a big positive for the economy (encouraging GDP growth). In summary, we believe that there is compelling historical evidence that strong GDP growth leads to strong corporate profits, and strong corporate profits lead to strong stock prices. We remain bullish on U.S. stocks.
For more commentary or information on Guild Investment Management, please go to guildinvestment.com.
