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Core CAPEX: The Red Flag Recession Indicator?

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    October 14, 2012

    A few minutes ago I took a quick look at the most popular financial news websites, which includes Business Insider (certainly the most entertaining of the bunch), and I was struck by this headline: DAVID ROSENBERG: Here’s Your Big Red Flag That We Could Be Heading For Recession.

    I always find Rosenberg’s chronically bearish commentaries of interest and in this case by the fact that he’s reported to view CAPEX as a recession indicator. The Business Insider website included a chart illustrating the year-over year change in the 3-month moving average back to early 2003. Thus the chart only includes one NBER designated recession on which to evaluate the efficacy of CAPEX as a recession indicator.

    Adjacent you can see a tiny version of the BI CAPEX chart.

    But I was also arrested by the fact that after the latest durable goods report was released, I had also charted the YoY change the 3-month moving average of CAPEX. It was an interesting chart, I thought, but inconclusive. First, let’s take a look at monthly CAPEX, the popular abbreviation for Capital Expenditures, which the FRED database labels as Manufacturers’ New Orders: Nondefense Capital Goods Excluding Aircraft. The data only goes back to February 1992, but in charting the complete series, my version adds another recession, the eight-month contraction in 2001, to the CAPEX context.



    Here is a year-over-year percent change of the series.



    And, finally, the chart below is the YoY of a 3-month moving average of the complete series.



    Indeed, the CAPEX monthly data has been negative for six of the last 12 months, and the 3-month MA has been trending down since March of this year.

    Ultimately my sense is that this data series manipulation (YoY of the 3-month MA) has an insufficient track record to be considered a definitive recession indicator. N=2 is not enough to make reliable recession probability forecasts. But CAPEX is definitely something I’ll add to my monthly Durable Goods updates:

    The next Durable Goods update is scheduled for October 25th.


    Images: Flickr (licence attribution) 

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.