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New Business September 2, 2009, 5:31PM EST

The Return of Capital Spending

Companies that stopped capital outlays look to be starting them again, and that's a key component to global recovery

By Tara Kalwarski

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Richard Mia

Are companies ready to spend?

As the economy went into a tailspin last year, many companies stopped investing in their operations. For months they've refused to buy new computers, trucks, and other capital goods in an effort to stave off losses. The downturn in capital spending has been the worst since the Great Depression.

Now some U.S. corporations are opening up their wallets, laying the groundwork for a global recovery. A BusinessWeek analysis of companies in the Standard & Poor's 500-stock index found that 45% increased their global capital expenditures in the second quarter from the prior one. Only 19% did so in the first quarter. American Express (AXP), ExxonMobil (XOM), Verizon Communications (VZ), Wal-Mart Stores (WMT), and 106 others even upped their spending on a year-over-year basis. And those that continue to cut spending are doing so less drastically; expenditures overall have slipped just 3% in the latest quarter, vs. a 31% decline in the first. "Folks have changed their mindset toward cutting," says Steven Wieting, an economist at Citigroup (C).

The changing sentiment is another glimmer of hope for the global economy. Companies generally don't shell out money on new equipment, software, and buildings unless they think demand is picking up and profits are sustainable. The second quarter was encouraging: Earnings for the S&P 500, although still down from last year, were roughly 40% higher than in the first.

Capital spending will also be a critical growth driver in the coming years, especially given the dire state of consumers. The "expenditures will support a global recovery," says Kent Engelke, chief economic strategist at Capitol Securities Management. Already the European and Asian economies are benefiting from the uptick in spending by American multinationals. The U.S. economy, however, may lag somewhat as these companies continue to invest more of their dollars overseas. Capital spending within the U.S. fell 4% in the second quarter from the first—a bit worse than the drop in global expenditures among S&P 500 companies.

There's plenty of risk ahead. First, credit is scarce and costly, which makes it difficult to pay for outlays. St. Louis utility Ameren (AEE) spent an extra $44 million in the latest quarter, vs. a year earlier. But the company says it was a one-time bump for equipment upgrades required by regulators. "We're reducing capital expenditures," says spokeswoman Susan Gallagher. "Credit is still very expensive for us right now." Second, spending in some areas will continue to suffer for a while. Given the glut of office space and rising vacancy rates, business construction is especially vulnerable.

Better Credit Quality

The companies that are spending fall into two camps: those that are playing catch-up and those that are more optimistic about their prospects. The first group includes health insurer Cigna (CI), which increased expenditures by $16 million in the latest quarter. But Cigna's spending is off its peak, a level the company says it won't reach again until at least 2010. Such companies "cut back on capital spending much more than the fundamentals would have needed," says Milton J. Ezrati, senior economist at mutual fund firm Lord Abbett.

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