Conservative economists who say that capital spending drives consumer spending are about one-third correct and two-thirds wrong. Yes, when you put up a new plant, you create jobs and wages and, therefore, consumer spending power. But that impact pales relative to the causality that exists in the other direction: the influence of consumer spending on capital spending. Consumer spending represents the demand for goods and services that strain capacity, leading to orders to build those factories and equipment. So, cyclically, capital spending lags consumer spending, and the charts pretty much prove it. Like employment, capital spending tells us where the economy has been, not where it is headed. That role belongs to consumer spending.
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