Bloomberg News

Capital Spending Nears 2008 Level as U.S. Skates New Recession

November 15, 2011

Nov. 7 (Bloomberg) -- Capital spending at U.S. companies from Apple Inc. to 3M Co. is at the highest level since 2008 as upgrades to plants, property and equipment show some executives embracing the likelihood that the economy averts recession.

Expenditures rose 24 percent to $43.3 billion in the third quarter for 140 non-financial companies in the Standard & Poor’s 500 that had released such data as of Nov. 4. Starting with Alcoa Inc.’s earnings report on Oct. 11, spending last quarter was the most since the end of 2010. Year-to-date investments of $149 billion are the highest since 2008, the analysis shows.

Corporate investment in equipment and software climbed at a 17.4 percent annual pace in the third quarter, and earnings per share for S&P 500 companies have jumped 16 percent so far. While economic growth is slow, it’s enough to spur investment, said Frederic Dickson, who helps oversee $28 billion as chief market strategist for D.A. Davidson & Co. in Lake Oswego, Oregon.

“A lot of companies postponed upgrading facilities, hardware and technology given the fact they were fearing the economy would go back into recession,” Dickson said. “Now that they feel more comfortable the economy has skated around recession, they’re making necessary expenditures.”

U.S. gross domestic product rose at a 2.5 percent rate last quarter to $13.35 trillion, topping for the first time the peak of $13.33 trillion in the last three months of 2007. Expectations are for further expansion, and for inflation, which would make it more costly to sit on cash, said Michael Gayed, chief investment strategist with Pension Partners LLC.

2008 Peak

“It’s indicative of some kind of an expectation of a rebound of sorts going on in the next one to two years,” said Gayed, whose New York-based company oversees about $140 million.

Apple more than doubled expenditures to $1.6 billion in the third quarter from a year earlier, International Business Machines Corp. boosted spending 55 percent to $1.3 billion, while Diamond Offshore Drilling Inc. invested $543 million, an almost sixfold increase.

Annual capital spending for S&P 500 companies had tumbled as a result of the recession that began in December 2007 and ended in June 2009. The $149 billion in expenditures so far this year for the 140 companies screened, surpasses the $146 billion that the same companies spent last year and is just short of the $169 billion peak for 2008.

Apple’s spending began rising faster than sales this year after it had tracked sales growth for years, Ben Reitzes, a New York-based analyst with Barclays PLC, said in a Nov. 2 report. The stepped-up investment at Cupertino, California-based Apple, the world’s second-biggest maker of smartphones, “illustrates some Apple optimism on prospects over the long term,” he said.

Economic Headwinds

Spending by companies is still unlikely to surpass the 2008 peak until consumer demand shows clear signs of recovery, said Ryan Wang, an economist with HSBC Holdings Plc in New York, who predicts GDP growth of 1.8 percent for this year and next.

“There still are a lot of headwinds for the consumer,” Wang said. “That’s going to keep growth moderate.”

Consumer purchases increased 0.6 percent in September, helping propel the world’s largest economy through the third quarter while policy makers moved to spur growth and hiring. Without a pickup in incomes, which rose 0.1 percent, households may be unable to maintain spending. Consumer confidence also fell last week to its lowest level since the first quarter of 2009, the Bloomberg Consumer Comfort Index shows.

Companies in industries such as oil, gas and mining, including Diamond and Halliburton Co., maintained spending during the recession, Wang said. Companies tied to home construction, such as Chicago-based wallboard producer USG Corp., slashed spending and have kept it at a minimum, he said.

IBM, 3M

IBM, the biggest computer-services provider, has spent to boost sales in business initiatives such as Smarter Planet, business analytics and cloud services, Chief Financial Officer Mark Loughridge said on an Oct. 17 conference call with analysts to discuss third-quarter earnings. Sales have doubled this year for cloud services, increased 50 percent for Smarter Planet and risen 20 percent for business analytics, he said.

“The investments we’ve made in key growth initiatives are paying off and drove our revenue performance this quarter,” he said. Since 2000, Armonk, New York-based IBM has made capital expenditures of $43 billion, according to the company’s website.

3M is investing $1.3 billion to $1.5 billion a year, mostly in international markets, CFO David Meline said in a conference call with analysts on Nov. 3. The St. Paul, Minnesota-based company wants to produce more in international markets that have higher growth rates, he said. Spending on current businesses is a priority over acquisitions because the investment generates return on capital of more than 20 percent, he said.

Positive Sign

“We’re in a cycle now where we’re running with a capital investment that’s pretty strong,” Meline said. “That’s primarily driven by growth of our volume and activity in our international businesses as we localize more production.”

Companies may be boosting capital expenditures now before a tax benefit from accelerated depreciation on investments ends in December unless extended by Congress, Wang of HSBC said.

“Companies have stated that part of their capital expenditures are indeed intended to take advantage of that accelerated depreciation that’s available,” Wang said.

The recovery in capital expenditures is still a step in the right direction, he said.

“It just says that final demand is growing so that’s a positive sign and we’ll have to see if it keeps going,” Wang said.

--With assistance from Sarah Frier and Shin Pei in New York and Adam Satariano in San Francisco. Editors: Romaine Bostick, John Lear

To contact the reporter on this story: Thomas Black in Monterrey at tblack@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Kevin Miller at kmiller@bloomberg.net


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