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Businesses are cutting back their investments

High-tech washing machines at the LG stand at the IFA 2011 consumer electonics and appliances trade fair

Durable goods, like washing machines, were up in December. But business investment in capital goods is not doing so well. Sean Gallup/Getty Images

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The Commerce Department said Tuesday that orders for durable goods — big-ticket items that tend to last a few years — were up in December.

But there’s a certain type of durable good we pay attention to — capital goods, which businesses buy to produce more stuff. Orders for capital goods dropped the most in eight months, which is not a good look for business investment.

The Conference Board said Tuesday that consumer confidence — how regular shoppers feel about the economy — improved more than expected.

So why do businesses seem to be skeptical about the economy while consumers are feeling good?

Consumers are feeling better about the economy because, after a long economic recovery, a lot of people have low expectations, according to Josh Bivens, director of research at the Economic Policy Institute.

“They have really beaten down expectations, and so if you look over the past year, unemployment is pretty low, wages are doing not great but OK. Maybe they’re like, ‘This is as good as it’s been for a while,'” Bivens said.

But business investment has been slowing for months now. Economists like to pay close attention to those numbers because weak business investment eventually ripples through the rest of the economy.

“If you’re trying to predict whether or not a recession is coming, durable goods will sometimes go down more quickly than other parts and be a better forecasting instrument,” Bivens said.

That’s because business investments in durable goods are a reflection of companies’ own forecasts. Allison Schrager, senior fellow at the Manhattan Institute, said businesses are looking at the economy in the long term.

“As opposed to consumers who are really experiencing a very strong economy and their outlook is that is appreciably shorter,” Schrager said. “When businesses invest, they’re also often now more and more thinking about global markets, not just domestic markets.”

And with the trade war far from over and other risk associated with climate change, the outlook for the global economy is a bit uncertain.

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