School's Out (or Hot for Teacher)

JACKSON HOLE, Wyo. -- Three orders of business today.

(a) The April durable goods numbers.

Equipment spending (outlays for information-processing apparatus and computers and peripherals and such) accounts for roughly 58% of fixed investment; fixed investment accounts for roughly 17% of gross domestic product. It would therefore be a good thing if we had in hand a series that tracked equipment spending pretty well. That way, we wouldn't have to wait until the end of July for the release of second-quarter GDP numbers to judge the progress of one of the bigger sectors of the economy.

It turns out that we do have such a series: Shipments of nondefense capital goods excluding airplanes (or NDCGEA), which can be found in the durable goods

report, serve as a decent proxy for equipment spending. And they're still cruising.

They troughed at a 3% year-on-year rate in February 1999 and have been accelerating (in somewhat stair-step fashion) since. They turned in 14.1% year-on-year increases in both March and April, which go down (save a January upwiggle) as the strongest such gains in five years.

They're also on track (assuming, just for the hell of it, below-trend increases in both May and June) to post a second-quarter (annual) increase of 13.9%. And though, dear readers, it might be tempting to compare that figure to the 26.6% increase we saw during the first quarter and conclude

slowdownicus meaningfulicus

, that, O my brothers, is not the thing to take away here.

The January-February-March increase went down as the biggest quarterly gain of the cycle; as such, it surprises us none to see a littler gain in its wake. (We pointed out in a

story at the beginning of the month that things like this would happen). More important, though, is how the second-quarter increase stacks up against the NDCGEA performances we've seen since the investment boom began about five years ago, and here's where the real learning happens: It handily beats a 1995-99 average quarterly increase that clocks in at 8.8%.

So no, equipment spending won't contribute as much to economic growth during the second quarter as it did during the first, when it helped to the tune of a whopping 2.35 percentage points. It will, however, contribute more than the 1.1 percentage points it's been adding (on average) during the past few years.

Why is that important?

Our central bankers want to see conclusive signs of meaningful economic slowdown, and there rests squarely on the shoulders of the numbers a burden to show them.

These don't.

(b) The April consumption numbers.

Consumption was

growing at an 8.4% year-on-year rate as the first quarter ended. The below-trend April increase reported this morning, combined with (just for the hell of it) conservative May-June assumptions, puts it on a path to decelerate to an 8.1% rate come July.

Is that not encouraging? Won't that make policymakers happy?

No. Consumption won't contribute as much to economic growth during the second quarter as it did during the first, when it helped to the tune of a whopping 5.02 percentage points. It is still so strong, however, that it will contribute roughly 3 full percentage points, which is exactly what it's been adding (on average) during the past few years.

Well maybe that's just the beginning. What if consumption just peaked? I think it'll continue to decelerate through year-end. What makes you think it won't?

Our final order of business.

(c) The April income numbers.

Disposable income (income less taxes) grew 5.1% in 1998. It grew 5.6% last year. It was rising at a 5.8% year-on-year rate as the first quarter ended. It is on track to grow at a 6.3% rate during the second quarter.

Now here's some long-weekend homework for you. I want answers to the following questions first thing Tuesday morning.

(i) How many times since (say) World War II has consumption growth slowed meaningfully while income growth was still accelerating?

(ii) On the heels of its strongest showing in 16 years and against a backdrop of accelerating income growth, the pace of consumption growth decelerates by three-tenths of a percentage point. This is best described as (a) the beginning of a fundamental spending slowdown; (b) just a wiggle; (c) not enough information to answer.

And we finish with two true-false extra-credit questions.

(i) Consumption growth accelerated to 5.9% in 1998 from 5.5% in 1997 even though income growth decelerated to 5.1% from 5.4%.

(ii) The Treasury actually contains lots of real treasure.

Class dismissed.

And hellooooo SUMMER!!