Fisher Investments Editorial Staff
Corporate Earnings, US Economy

Headlines Deceive

By, 09/27/2010

Story Highlights:

  • August US durable goods orders were reported Friday and, beneath the surface, business spending increased again.
  • Businesses are gradually deploying cash from their currently large stockpiles—a strong positive factor.
  • Combining today's report with last week's US Federal Reserve Flow of Funds report shows businesses are spending cash quickly and replacing it almost equally as fast.


August US durable goods orders reported Friday showed a headline decline of 1.3%, following July's upward revision to a gain of 0.7% (previously reported as a 0.3% decline). Yet despite the decline, stocks climbed sharply after the release.

Why? Likely in part because the headline number obscured the report's true strength. In a reversal from July's -5.3% decline, non-defense capital goods orders excluding aircraft increased 4.1%. So beyond the headline number, August's story was a reacceleration—businesses spent more than in July. Maybe not on aircraft (which is typically quite volatile), but on most other goods.

The ongoing business spending revival in recent months and even quarters has served as a strong tailwind since the recent US recession ended. From Q2 2009 through Q2 2010, US business spending has increased by over $300 billion dollars*—and has been particularly strong in 2010. Actions speak louder than words—and businesses are showing their increasingly confident global economic view by actively putting cash to work (though their words speak to greater confidence as well, like German business leaders, whose confidence reached a 3-year high).

Plus, business spending is an important precursor to gains in many areas of the economy—for example, technology companies stand to reap big benefits from restarted upgrades shelved during the downturn, media companies are benefiting from new marketing campaigns, and manufacturers are planning expansions. Business spending also typically leads better employment conditions—labor is one of businesses' single largest costs—and continued improvements appear to be approaching.

But gains logged thus far are the tip of the corporate liquidity iceberg. Friday's release followed the prior week's Federal Reserve Flow of Funds report showing US companies still have approximately $1.84 trillion in cash on their books. Over the past few quarters (and in Friday's durable goods report), businesses have increased investment and consumption sharply. But the Fed's report indicated rising profits have replaced deployed cash almost equally as quickly. As we've written here before, when firms' liquidity is high, expect it to be spent in the near future through increasing mergers and acquisitions, dividend payments, and aforementioned business spending.

While we fully anticipate there will be periods of deceleration and periods of acceleration (like almost any economic statistic), business spending has sharply increased recently and has ample fuel to continue. Combine this with motivation stemming from a global economic expansion, sharply increased profits, and improved technology and productivity, and the recipe for more bullish business spending is in place. While it's unlikely businesses splurge all their cash overnight (in fact, we shudder to think how many bookkeepers would get carpal tunnel from writing $1.84 trillion worth of checks at once), over time business spending is likely to continue its strong contribution to economic growth.

 *Source: Bureau of Economic Analysis,


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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