Coming Week: Enduring Issues

On the business spending front, Wednesday's durable goods report for February is projected to show a 3% rise. The growth is largely due to a rebound in aircraft orders, which plunged in January and lead to a 7.8% drop in overall orders for that month.

While forecasting an aircraft-led rebound, "the recent slowdown in industrial activity has resulted in an increase in business caution," write the BofA economists. "With below-trend growth prospects over the first half of 2007, demand for capital goods likely was restrained."

Ahead of the durable goods report, Tobias Levkovich, chief U.S. equity strategist at Citigroup, argued the decline in business investment "reflects a number of secular trends," including outsourcing by manufacturers. However, a rise in share buybacks and dividends "argues fairly convincingly that companies have not turned their collective backs on their investment needs," he writes.

Furthermore, "capital investment usually grows at a double-digit rate year-over-year once capacity utilization moves above 80%," Levkovich notes. After plunging in the aftermath of the bursting of the tech bubble, capacity utilization did not climb back above 80% until late 2005, but has remained there since.

On a related note of optimism, the strategist was "struck by the pervasiveness of capacity addition/upgrade comments" by management teams at Citigroup's recent Industrial Manufacturing Conference. An accompanying study of 240 companies showed a planned capital expenditure spending increase of more than 11%, led by telecom, semiconductor equipment, transportation, and cable/broadcasting, while homebuilders and electronic contract manufacturers had some of the weakest capital spending plans.