Fading Investment Signals
Spare a moment to think about Japan's Dec machine tool orders, which were on the weak side in December. True, they rose 40.5% yoy, but the monthly movt was 1.3SDs below historic seasonal trends. The weakness was mainly foreign: export orders, which usually make up about two-thirds of orders, rose only 30.6% yoy and were 1.2SDs below trend, whilst domestic orders were still up 6.12% yoy (and were 0.7SDs below trend).
What's going on? Two things are worth considering. First, this might be about China and, incidentally, the auto industry. Or maybe specifically China'[s auto industry, which is a mess. China's car sales fell 4.3% in 2018, fell 9.4% in 2019, fell 2.1% in 2020 and managed a rise of 6.6% in 2021. 2021's car sales remained 13.2% below levels seen in 2017. They're still under pressure: China's auto industry is almost alone in being unable to raise prices: although China's PPI iron & steel prices were up 21.4% yoy in Dec, auto prices managed only a 0.3% rise. So they won't be in the mood for heavy investment: in fact, auto-industry investment fell 3.2% during Jan-Nov.
More broadly, the switch from internal combustion engines to electric cars means a dramatic cut in demand for machine tools by the auto industry. As electric cars take over, demand for auto-industry machine-tools will actually fall - with the tipping point probably arriving around 2026-27.
If it were just Japan's machine tool orders, it would be one thing. But the investment-spending signals are deteriorating all over the world. My shocks & surprises index for capital goods sector fell into negative territory early in December, and is now the most negative since August last year. The 12m average is also just about to turn negative for the first time since September 2020, snuffing out a short-lived recovery which had in turn overturned a negative trend which had been running since mid-2018.
Fading investment spending is obviously discouraging news for the global recovery cycle, and also for profits: after all, the Kaleckian profits equation gives substance to the neo-Keynesian observation that whilst household spend what they earn, the corporate sector earns what they spend . . . For Japan, net investment spending is the source for 47% of total profits.
