Bloomberg News

Capital Spending in U.S. Seen From Macy’s to Berkshire

April 07, 2014

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The long-awaited pickup in U.S. business investment will take place this year. No, really.

The oldest capital stock in decades, more clarity on fiscal policy, improving growth prospects and companies awash in cash mean the stars have aligned to boost spending on commercial structures and equipment, according to economists such as David Rosenberg and investors such as Brian Jacobsen. Companies from Macy’s Inc. to Warren Buffett’s railroad are planning on increasing capital outlays to enhance competiveness.

“Conditions are perfect, so business-investment rates should be at the kind of levels we saw in the mid-2000s,” Stanford University economics professor Nicholas Bloom said. Equipment expenditures climbed 8.6 percent on average from 2004 to 2006. “If it doesn’t come this year, it’s never going to come.”

Investment in non-residential projects and equipment will rise by about 7 percent this year after a 3.1 percent advance in 2013, according to economists at Goldman Sachs Group Inc. Counterparts at UBS Investment Bank see equipment spending increasing 7.5 percent followed by a 10 percent gain in 2015. Rising expenditures would boost productivity and growth.

Economists aren’t the only ones keeping the faith. Capital spending is “definitely something that is on our radar,” said Jacobsen, who helps oversee $242 billion as chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin. He said shares of equipment and software makers and manufacturers of goods used in construction will benefit.

Economic Outlook

“We were expecting to see an acceleration of capex spending that sadly did not materialize in 2013,” Jacobsen said in an interview. “We’re still thinking it’s something that will play out. What’s different this year is that the economic outlook is slightly better.”

Gross domestic product is projected to climb 2.7 percent this year after broad-based cuts in government spending restrained growth to 1.9 percent in 2013, according to economists surveyed by Bloomberg.

In anticipation of growing sales and the need to replace outdated equipment, about 49 percent of companies expect total capital outlays to increase in 2014 over last year while about 21 percent see lower spending levels, according to the Federal Reserve Bank of Philadelphia’s business outlook survey in March. At the same point last year, about 39 percent forecast more spending and 32 percent projected fewer outlays.

At Macy’s (M:US), the second-largest U.S. department store company, capital spending in the fiscal year ended Feb. 1 fell short of its forecast by $62 million. In August, they had projected expenditures would reach $925 million.

Macy’s Plans

This year, Macy’s plans to spend $1.05 billion, including outlays for projects delayed from 2013. The sum is “the right number that’s allowing us both to continue to maintain the store base we have, remodel, open the new stores that we see, but also invest aggressively,” Chief Financial Officer Karen Hoguet said at a consumer conference on March 25.

Improving economic growth and consumer spending will give companies the assurance to invest this year, said Maury Harris, chief economist at UBS Investment Bank in Stamford, Connecticut.

“You have another year of corporate cash under your belt, so you’ve got more money to spend internally,” Harris said. “You also have a much higher level of business confidence than you had last year.”

U.S. non-financial companies rated by Moody’s Investors Service held $1.64 trillion in cash at the end of 2013, eclipsing the previous record of $1.46 trillion in 2012, according to a March 31 report from the credit grader.

Overseas Cash

At the same time, Moody’s estimated that as much as 58 percent of that cash is held overseas as companies take advantage of favorable tax conditions. That would make it more difficult for firms to spend those funds in the U.S.

Nonetheless, capacity utilization, which measures the portion of a plant that is in use, shows companies are running out of other options for boosting production, Harris said. The gauge climbed to 78.4 percent in February, according to Fed data.

While 80 percent is typically seen as an inflection point for bigger gains in business equipment spending, thresholds have been lower following major recessions, Harris found. Industries such as mining and machinery manufacturing are already operating above their long-run averages, Fed data show.

The prospects that interest rates will increase this year and next will also stimulate spending, according to UBS research. Rising borrowing costs lower the value of stock buybacks and dividends that syphon funds away from investment.

Growing Old

Older buildings, facilities and infrastructure will probably encourage executives to pull the trigger. The average age of private nonresidential structures -- from warehouses and offices to petroleum pipelines and railroad replacement track -- reached 22.2 years in 2012, the oldest since 1964, according to the Bureau of Economic Analysis. At 7.4 years, the average age of equipment matches the highest since 1994.

“There’s been almost no growth in the private sector capital stock over the course of the past five years, and that’s never happened before,” said Rosenberg, the Toronto-based chief economist at Gluskin Sheff & Associates Inc. “The corporate sector has barely replaced the obsolescence, and that has finally come home to roost in productivity growth, which has practically evaporated over the course of the last year.”

Less Productive

Productivity in the U.S. rose 0.8 percent on average over the past three years, the weakest since the period from 1993 to 1995, Labor Department data show. Corporate profitability is in jeopardy if the trend isn’t reversed, Rosenberg said.

Capital spending at Tiffany & Co. (TIF:US), the world’s second-largest luxury jewelry retailer, will climb to $270 million in 2014, up 22 percent from a year ago.

Most of the increase reflects investment in information technology, as the company upgrades and introduces new systems for customer-relationship management and advanced order and inventory management, “all of which should yield longer-term sales and working capital benefits,” Chief Financial Officer Jim Fernandez said on a March 21 conference call.

Reduced fiscal uncertainty will also encourage companies to tap unused cash, said Bloom at Stanford, located near Palo Alto, California.

“Capex is the most sensitive component of GDP growth to uncertainty,” said Bloom, who helped develop an index of economic policy uncertainty that is close to the lowest reading since 2007. “We have very low interest rates, very low inflation rates and uncertainty has finally fallen back down. It’s the golden era for investment.”

Bookings Drop

So far this year, companies have kept a tight grasp on purse strings. Bookings (CGNOXAI%) for non-military capital goods excluding aircraft, a proxy for business spending, fell 1.3 percent in February after a 0.8 percent gain in January that was smaller than initially reported, according to Commerce Department data.

“Businesses remain reluctant, primarily because the buyer of their product -- the global consumer -- is not seeing wage increases,” said Bricklin Dwyer, an economist at BNP Paribas in New York.

Buffett is more optimistic. Berkshire Hathaway Inc.’s subsidiaries spent a record $11 billion on plants and equipment in 2013, he wrote in his 2013 annual letter to shareholders published last month. Eighty-nine percent of that money was spent in the U.S., where the “mother lode” of opportunity resides, he wrote.

Buffett said the $3.9 billion in capital spending at his Burlington Northern Santa Fe railroad was a single-year industry record. And, he’s not stopping there.

“We will spend considerably more in 2014,” Buffett wrote. “Like Noah, who foresaw early on the need for dependable transportation, we know it’s our job to plan ahead.”

To contact the reporter on this story: Victoria Stilwell in Washington at vstilwell1@bloomberg.net

To contact the editors responsible for this story: Carlos Torres at ctorres2@bloomberg.net; Vince Golle


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Companies Mentioned

  • M
    (Macy's Inc)
    • $57.07 USD
    • 0.86
    • 1.51%
  • TIF
    (Tiffany & Co)
    • $91.03 USD
    • 2.19
    • 2.41%
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