Further Capex Weakness? These Numbers Say ‘Neigh’ – Real Time Economics

A hallmark of this recovery has been the skittishness of businesses, especially when it comes to undertaking big capital spending projects. That caution seems to be easing—and the idea comes straight from the horse’s mouth.

After speaking with small-business executives (and racehorse owners) in Louisville, Kentucky, home of Churchill Downs, Jeffrey Kleintop, chief market strategist at LPL Financial, looked at the trends in the prices paid at auction for racehorses and real business spending on structures. He found both series move in similar fashion, allowing for a year’s lag in investment to account for the time it takes for building projects to get started and then show up in the government data.

While the link may seem far-fetched, Mr. Kleintop thinks the correlation isn’t so odd.

“When risk-taking comes back, it comes back in many forms,” says Mr. Kleintop.

“Thoroughbreds are costly and speculative investments,” he says. “The prices paid reflect the general willingness of horse owners to take risk” usually because they are more optimistic about their economic future.

Similarly, business owners who feel more confident about the economy are more willing to take a risk on expanding their facilities and spending money on new equipment, he says.

The horse-capex link brings a new twist on ‘animal spirits,’ the concept of risk-taking in the economy.

Indeed, the jump in prices paid at the April auctions for two-year-old thoroughbreds suggest business investment will strengthen in the second half of 2014 and into 2015. LPL forecasts real business investment will increase between 5% and 10% for all of this year. That’s a good gallop compared to the 2.7% gain in 2013.



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