Companies Are Ready to Spend Again

By Karyn McCormack After two consecutive years of declines, capital spending by companies in the S&P 500-stock index is expected to turn positive for 2004, says Standard & Poor's. The 500 companies will post a year-over-year spending rise of 5.53%, according to S&P.

Capital expenditures for the first quarter of 2004 vs. the first quarter of 2003 increased 5.36%, S&P says. This was the first quarter-over-quarter increase since the fourth quarter of 2001. Spending for the second quarter of 2004 vs. the second of quarter of 2003 is also running higher, at 5.73%. Historically, 32% of the expenditures are made during the first six months of the year, with the third quarter accounting for 29% and the fourth quarter 39%.

HEALHTY INCENTIVES. The expected rise in capital spending this year may not seem like a lot, but it comes after an 8.95% decline in 2003 and 15.26% drop in 2002, and more relevant, an unwillingness of managements to commit, says Howard Silverblatt, equity market analyst for S&P.

One reason for the rebound dates back to the aftermath of the September 11 terrorist attacks, when Congress signed a bill with incentives to encourage corporate spending. The incentives give companies that purchase necessary equipment before the end of 2004 an accelerated depreciation schedule, which permits them to write off the asset quicker and leads to larger deductions, resulting in reduced tax liability and higher cash flow.

Still, Silverblatt notes that while capital expenditures are expected to increase this year from last, they're still down 3.92% from 2002 levels and off 18.49% from their 2001 total.

Capital Spending Trends

Quarter

Change from Year-Ago Quarter

2004 Q2 (preliminary)

5.73%

2004 Q1

5.36%

2003 Q4

-5.10%

2003 Q3

-8.56%

2003 Q2

-11.91%

2003 Q1

-17.12%

2002 Q4

-15.68%

2002 Q3

-13.50%

2002 Q2

-15.88%

2002 Q1

-16.22%

2001 Q4

9.59%

2001 Q3

10.13%

2001 Q2

18.74%

2001 Q1

25.40%

2000 Q4

17.24%

2000 Q3

15.87%

2000 Q2

14.55%

2000 Q1

14.45%

S&P figures also show that capital spending in the utilities and financials sectors of the S&P 500 continues to lag, while industrials and telecommunications surge. Over the past five years, health care has seen the largest gain among the sectors, at a 60% increase, and information technology the largest reduction (30%). Consumer discretionary now accounts for 21% of all expenditures for companies in the S&P 500.

Q2 2004

Q2 2004

Q2 2004

Change from

Change from

Sector

Sector

Q2 2003

Q2 2002

Portion

Consumer Discretionary

0.03%

-12.62%

21.42%

Consumer Staples

8.56%

7.02%

10.99%

Energy

3.43%

1.62%

16.57%

Financials

-13.17%

2.49%

5.11%

Health Care

-4.81%

1.49%

6.61%

Industrials

23.75%

-19.23%

15.95%

Information Technology

6.31%

-18.35%

8.33%

Materials

-2.26%

2.00%

3.87%

Telecommunication Services

24.79%

-9.34%

10.24%

Utilities

-30.26%

-69.54%

0.92%

S&P 500

5.73%

-9.61%

100.00%

McCormack is senior producer for BusinessWeek Online