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Friday, March 27, 2009

Ugly 

I have been feeling a little more optimistic about the economy lately. But next week is the end of the first quarter of 2009. And Calculated Risk explains why the financial news isn't going to be very good:
A little story ...
Imagine ACME widget company with a steadily growing sales volume (say 5% per year). In the first half of 2008 their sales were running at 100 widgets per year, but in the 2nd half sales fell to a 95 widget per year rate. Not too bad.
ACME's customers are telling the company that they expect to only buy 95 widgets this year, and 95 in 2010. Not good news, but still not too bad for ACME.
But this is a disaster for companies that manufacturer widget making equipment. ACME was steadily buying new widget making equipment over the years, but now they have all the equipment they need for the next two years or longer.
ACME sales fell 5%. But the widget equipment manufacturer's sales could fall to zero, except for replacements and repairs.
And this is what we will see in Q1 2009. Real investment in equipment and software has declined for four straight quarters, including a 28.1% decline (annualized) in Q4. And I expect another huge decline in Q1.
For non-residential investment in structures, the long awaited slump is here. I expect declining investment over a number of quarters (many of these projects are large and take a number of quarters to complete, so the decline in investment could be spread out over a couple of years). And once again, residential investment has declined sharply in Q1 too.
When you add it up, this looks like a significant investment slump in Q1.

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