Capital spending by American business has been slack for nearly a year, but will grow in the coming months. Orders for non-defense capital goods (excluding aircraft) have actually declined since last August. GDP data suggests slow spending growth for business equipment and software. Nonetheless, there’s good reason for optimism.
Capacity utilization in manufacturing fell in the recession—no surprise there. But after hitting a low of 63.7 percent in 2009, it has rebounded to 78 percent. (Keep in mind that capacity utilization is not adjusted for normal downtime for maintenance and model changeovers.) That 78 percent is just a hair less than the peak before the 2008 recession. Thus, there’s reason to believe that companies need to add to their manufacturing capacity now.
Corporations have cash available to spend. Their total cash holdings are at an all-time record high, and are nearly at a record high relative to GDP. Borrowing costs are incredibly low for companies with good credit.
The softness in capital spending can only be explained by lack of optimism on the part of corporate executives. The Business Roundtable’s CEO Outlook is well below its 2011 peak.
A very positive sign, though, is that companies are spending money on construction of manufacturing facilities. Year-to-date activity is up 50 percent. If they are constructing the buildings, won’t they buy equipment to put inside?
The largest gainer within manufacturing construction is chemicals. Those plants and their related piping are expensive relative to the equipment inside. Electronics facilities, in contrast, tend to have equipment costs that are high relative to building costs. Nonetheless, the strong gain in construction certainly bodes well for equipment spending.
Absent a recession, business capital spending is likely to provide a major boost to the economy over the coming two years.
Read the entire Forbes article here.