US Daily Economic Notes:Capex outlook continues to brighten

Commentary for Friday: Measures of business confidence continue to point tosturdy spending growth. Case in point, yesterday we learned that the PhiladelphiaFed survey jumped 16.8points in May to 38.8, which was the second highestreading in the current business cycle. Recall that the headline Philadelphiabusiness conditions index began to pick up meaningfully in the wake of theUS Presidential election and peaked in February at 43.3. However, with respectto our 2.5% real GDP forecast for this year, the six-month outlook for capitalexpenditures (capex) within the Philadelphia Fed survey is sending an even morepositive signal.Source:

    In May, the Philadelphia Fed six-month capex outlook index fell -3.9points to 32.6.However, as we noted earlier this week, some modest retracement was to beexpected given that last month the capex outlook series reached its highest levelsince February 2000(38.0). Hence, despite the slight slip in May, the level of theindex remains very healthy, which bodes well for capital spending in the currentquarter and beyond. As the chart below indicates, the Philadelphia Fed capexoutlook series has historically led the trend in nonresidential fixed investmentby one quarter.

    Thus far this quarter, the six-month outlook for capital expenditures index hasaveraged 34.6, which is the highest level since Q11984(38.2). This is alsoup substantially from the Q1average of 26.2, which was the post-recessionhigh for the aforementioned series. Recall that last quarter, inflation-adjustednonresidential fixed investment increased 9.4% annualized, which was the bestquarter of growth since Q42013(9.5%). Importantly, the latest readings from thePhiladelphia Fed capex series strongly suggest that the momentum from Q1iscarrying over into the current quarter. In turn, we remain highly confident thatbusiness spending will continue to be a solid contributor to growth near term. Infact, our 2017real GDP forecast assumes a little over 7% growth in nonresidentialfixed investment this year.