Capital Spending Boosts the US Economy

A silver lining in the otherwise grim business of weaponry, discussed elsewhere in this issue with respect to Russia’s Zapad maneuvers, is that it contributes to capital spending on sophisticated technologies at industrial conglomerates with multiplier benefits to the overall economy.

This past week the Commerce Department revised its report on second quarter US activity up to 3% from a previously reported 2.6%, partly due to a stronger than realized pickup in capital spending and business investment.

Increased military spending contributed to this growth. Defense spending by Canada and the European nations in NATO was up significantly (over 4%) in 2017, and much of this spending was done with US based firms. In addition, the US agreed to the sale of over $12 billion in F-15 fighter jets in June to Qatar, and over $600 million of military planes to Nigeria to help it target Boko Haram.

But military spending is only a small piece of the overall positive economic outlook. Since the recession ended in mid-2009, economic growth has plodded along at an average of about 2% a year. A sustained breakout from that modest seems to be building based on a global pickup in growth supporting exports, rising employment supporting household income and spending, and robust corporate profits and confidence, supporting investment.

Total gross domestic product, a broad measure of the goods and services produced across the U.S., rose at a seasonally and inflation-adjusted annual rate of 3% in the second quarter.
That was the strongest quarter in more than two years, and some expect that growth can continue at that pace for some time.

For instance, at the end of August, home-improvement retailer Lowe’s Cos. said it expected 3.5% growth in same-store sales this year. ”Persisting job and income gains should continue to drive disposable income growth, and favorable revolving credit usage continues to hover near the highest rates of the current economic expansion, supplementing the spending power generated by stronger incomes,” Chief Executive Robert Niblock told analysts.

Some pessimism about the prospects for economic growth rests on official unemployment rate figures. However, these figures seem to understate the number of unemployed workers by categorizing them as ‘not participating’ in the work force, rather than as unemployed. This year, the US economy has seen over 1 million new jobs created with almost no movement in the unemployment rate and little wage growth. Because of this demonstrated inaccuracy in the unemployment rate, movement in wages should be a more telling than unemployment rates with respect to whether the economy has started to reach its growth potential.

The combined catastrophic impact of Hurricane Harvey and Hurricane Irma in America’s Southeast is certainly large enough to move the needle on national economic numbers for the third quarter of 2017. However, recovery efforts in this vital, populous and relatively wealthy area of the country should result in a commensurate increase in economic activity in the fourth quarter.

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