Consumers rally, while businesses run scared

The US economy has developed something of a split personality lately, with consumer confidence hitting a five-year high, while capital goods orders, an indicator of business investment, fall at a pace not seen since the height of the last recession. It is possible that consumers are still not fully aware of the tax hikes and government spending cuts scheduled to take effect at the start of next year, whereas better informed businesses are delaying investment projects, waiting to see if Congress reaches an agreement to avert the fiscal cliff. If so, then we would expect consumer indicators to weaken soon, as the media switches focus from the election to the fiscal cliff negotiations. Assuming a deal is eventually reached, however, investment could rally early next year, as businesses finally green-light those delayed investment projects.