A case was previously made that a covid-driven Q2 collapse in global business investment marked the completion of the 7-11 year Juglar cycle, which last bottomed in Q2 2009. Available Q3 data, indicating a strong rebound, are consistent with this view, which implies that business capex will act as a tailwind for growth in 2021 and beyond.
A Q2 trough implies that the latest cycle reached the maximum 11 years, following a relatively short prior cycle of 7.25 years (i.e. Q1 2002-Q2 2009).
The Q3 bounceback is evident in hard data on capital goods output, orders and imports. US core capital goods orders moved above their pre-covid level in August. The Atlanta Fed’s nowcast model was forecasting a 4.9% annualised fall in equipment investment in Q3 at end-July but now projects 38.1% growth following a series of upside data surprises.
The consensus expected a Q2 profits collapse to weigh on investment but profits appear to be rebounding similarly strongly. Sceptics now suggest that Q3 capex was boosted by a temporary catch-up effect, with renewed weakness likely in Q4 and into 2021. This is not supported by forward-looking capex components of business surveys: a G7 composite measure rose further in September and is close to its long-run average – see first chart.
Globally, China is leading the capex comeback. Manufacturing fixed asset investment returned to year-on-year growth in value terms in August on the back of a 19.1% surge in profits and solid enterprise money expansion – second chart. Business money growth is stronger in G7 economies.
The typical pattern is for business capex upswings to be financed initially from internal resources, with access to external credit increasing in importance as the cycle matures. Encouragingly, the September Cheung Kong Graduate School of Business monthly survey reported a further easing of credit conditions: the corporate financing index, which correlates with money growth, hit a 15-month high – third chart. The hope is that the next set of G7 quarterly bank loan officer surveys will show a similar reversal of credit tightening.
Business investment and employment decisions are closely related so the Juglar cycle turnaround is hopeful for labour market recuperation. The US Conference Board consumer survey for September reported a reduction in pessimism about job availability, suggesting that the “permanent” unemployment rate (i.e. excluding those classified as being on temporary layoff) was stable or fell last month – fourth chart.