[jyl]

Consumer spending and corporate capital investment are going in different directions.

On the consumer side, spending has been strong for a long time, through the stock market crash, economic recession, terrorist attacks, etc. Consumer spending kept the recession from being worse than it was. Home value increases, easy credit, tax rebates and tax cuts all propped up consumer spending. Now consumer spending is showing signs of rolling over, as many economists have been expecting. In June, gas prices took disposable income away from consumer goods. Decreasing home affordability is pressuring home-related durable goods. Layoffs were quite high, new job creation was low, and surveys of company intent to hire were weak.

On the capital investment side, spending was terribly weak during the recession and is now improving. Companies have made deep cuts in operating expenses (e.g. layoffs and lower wages), so their cash flow is strong. Credit has been easy and interest rates low. A tax break, which allows accelerated depreciation of capital equipment placed in service by the end of 2004, is also boosting capex. Therefore measures of current orders, like the Commerce Dept durable goods data and the ISM factory orders index, are quite strong.

Something to worry about, though, is that leading indicators are declining, suggesting that future capex may be weaker than current. Another thing to worry about is whether corporate revenues can keep improving if consumer spending (and employment) does not improve.