We've received a number of e-mails regarding the recent post on the possibility that rising CAPEX spending in the US is driving corporations to tap their credit facilities, thus increasing loan growth (see post). Most were highly critical of this line of thinking in their comments, using words such as "bogus", "propaganda", "head fake", "delusional", etc. Thanks for all the feedback. The argument that "things are different this time" understandably meets a great deal of skepticism, especially after a number of false starts and years of uncertainty. But evidence for a significant rise in corporate CAPEX spending continues to build. One could write a dissertation on this topic, but let's just look at 4 key data points:
1. Diminishing uncertainty. As discussed earlier (see post) federal government policy uncertainty (fiscal and monetary) that has been hounding corporate CEOs and investors for years has finally subsided, at least in the nearterm. Even the politically charged uncertainty around the implementation of Obamacare has been receding (more on this later). We can debate about the merits of the various policies but it is often the uncertainty more than the policy itself that spooks corporate decision makers.
The other trend that is often overlooked when discussing corporate spending in the US is the recent period of relative calm in the Eurozone. While the area's current economic malaise isn't great for US firms, it is important to remember that during 2011 - 2012, the risk of the monetary union's collapse was quite real. Imagine trying to make a major corporate expenditure decision when the world is concerned about Italy's or Spain's ability to roll government debt, as these nation's banking systems teeter on the verge of insolvency. Many of the structural issues that caused this crisis are still with us today, but the ECB's backstop dramatically reduced the nearterm uncertainty.
The constant barrage of scary news is receding, as the news-based uncertainty index finally drops to its pre-financial-crisis levels.
|Source: Economic Policy Uncertainty|
2. Corporate infrastructure is aging. From software to planes to telecommunications equipment, companies have severely underinvested in recent years, and it's time to start upgrading. Consider the fact that the average age of fixed assets such as factories, storage facilities, etc. is at levels not seen in nearly 50 years.
|Source: BofA/Merrill Lynch|
Moreover, some economists argue that slow productivity growth in recent years (discussed here) is a direct result of weak corporate spending. With plenty of cheap labor one didn't need to be too efficient in order to be profitable. But at some point companies will need to upgrade their aging technology and infrastructure in order to improve worker productivity.
3. CEO confidence. Based on the analysis done by Charles Schwab, CEO confidence tends to lead key CAPEX expenditures. And CEO confidence has risen sharply in recent months.
|Source: Charles Schwab|
4. Investors. Shareholders are demanding that companies begin using more of their massive cash balances toward CAPEX. The chart below from Merrill Lynch is quite compelling.
|Source: BofA/Merrill Lynch|
It seems that the stage is set for corporate spending to finally accelerate. And yes, the experiences of recent years make this possibility hard to accept for some. But evidence continues to mount.
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