A Sensitive Indicator

A SENSITIVE INDICATOR….Brad DeLong talks today about which industries are most cyclical ? and therefore most sensitive to downturns and upturns in the economy:

Spending on durable goods is even more cyclical: you can postpone purchases of durables when cash is tight during a downturn, and accelerate durables purchases when cash is plentiful. Spending on capital goods to make durable goods is even more of a business-cycle roller coaster: businesses will buy the capital goods needed to make durables only when they find that high demand for the durable goods they make has brought them to the limit of their capacity.

And the most cyclically-sensitive sectors of all–the tip of the whip that is the business cycle–make the equipment needed to make the capital goods that firms purchase in order to produce durable goods.

OK then: durable goods spending is cyclical. Equipment to make durable goods is even more cyclical. Equipment to make the equipment to make durable goods is even yet more cyclical.

You can guess my question, can’t you? What about the guys who make the equipment to make the equipment to make the equipment? Is that the tip of the tip of the whip?

POSTSCRIPT: On a serious note, Brad was linking to an article suggesting that the fortunes of semiconductor equipment maker Applied Materials might be a good leading indicator of the strength of the economy. They will announce second quarter results later today, and apparently the word on TheStreet.com is that “the feebleness of the recovery is becoming apparent and nobody expects Applied to spring any big upside surprises for the quarter now under way.” Too bad.

UPDATE: Applied Materials ended up announcing earnings of 5 cents a share. This story says that’s a penny better than expected, while this story says it’s a penny worse than expected. So you can flip a coin (a penny, presumably) to figure out whether this is positive or negative news.

Support the Washington Monthly and get a FREE subscription