American companies are poised to put idle cash to work as demand rebounds in 2013 after spending slumped amid the slowdown in China and Europe’s recession.
Manufacturers project they will invest more next year than this year, according to the Institute for Supply Management’s semiannual survey released yesterday. Orders for capital equipment excluding defense and aircraft rose 2.9 percent in October, the biggest increase since February, Commerce Department data showed Nov. 27.
Apple Inc. (AAPL), Starbucks Corp. (SBUX) and Chevron Corp. (CVX) are among those announcing additional expenditure plans as economies stabilize, banks ease lending rules and some industries approach full capacity. Companies, excluding financial institutions, are sitting on a record $1.74 trillion in liquid assets that could be put to use, especially if lawmakers agree to avert budget cuts and tax increases scheduled to take effect in January.
“Businesses are flush and highly competitive and this will shine through in a revival of investment spending by this time next year if Washington can get it roughly together,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.
Spending on capital projects, those meant to increase productivity and capacity, will increase 7.6 percent next year, the biggest gain for any December survey going back at least seven years, according to the Tempe, Arizona-based ISM’s poll of purchasing managers. Last December, respondents forecast a 1.9 percent advance for 2012.
A survey conducted by American Express Co. from Nov. 12 to Nov. 21 showed similar positive outlooks. Seventy-five percent of senior finance executives polled forecast sales will grow in 2013, and 69 percent project profits will improve. A majority, 59 percent, plan to invest to drive growth, in contrast to 37 percent who said they were focused on saving money to protect earnings, the survey showed.
“Companies’ expectations should pick up in the second half of 2013 and business spending should accelerate,” said Christophe Barraud, an economist and strategist at Market Securities-Kyte Group in Paris, top-rated forecaster of the U.S. economy in Bloomberg Rankings for the two years ended Oct. 31. He credits the low interest-rate policies followed by global central banks and government efforts in Europe and Japan to stimulate growth.
The Federal Open Market Committee today said it will purchase $45 billion a month in Treasury securities starting in January, expanding its asset-purchase program aimed at stoking the economy.
“The committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor-market conditions,” the FOMC said at the conclusion of a two-day meeting in Washington.
The Fed said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent. The committee “views these thresholds as consistent with its earlier date-based guidance.”
Stocks were little changed on concern the Fed won’t be able to offset the full effect of the looming changes in fiscal policy. The Standard & Poor’s 500 Index closed at 1,428.48 in New York, up less than 0.1 percent from yesterday.
Elsewhere today, U.K. jobless claims unexpectedly fell in November and a wider measure of unemployment dropped the most in 11 years, underlining the resilience of the labor market in the face of a weak recovery.
A pickup in U.S. capital spending will benefit companies including Caterpillar Inc. (CAT), the world’s largest maker of construction and mining equipment, and Deere & Co. (DE), the biggest global agricultural equipment maker, said James Paulsen, chief investment strategist in Minneapolis for Wells Capital Management, which oversees about $325 billion.
Growth “is again reaccelerating,” Paulsen said. That “should do wonders in accentuating animal spirits and boosting capital spending.”
The world economy will expand 3.6 percent next year, compared to 3.3 percent this year, the least since the 2009 recession, the International Monetary Fund projected in October.
Citigroup Inc.’s economic surprise index for China, a measure of how data are beating or trailing median forecasts, rose on Nov. 29 to 30.80, the highest level since March 8. German investor confidence jumped more than economists forecast in December, reaching a seven-month high, on speculation Europe’s largest economy will gather momentum, according to a report yesterday.
For now, business confidence in the U.S. is shaky because of concern lawmakers will fail to reach a budget deal to avert more than $600 billion in spending cuts and tax increases slated to take effect next year, which the Congressional Budget Office projects would tilt the economy into a recession.
Business Roundtable, an association of chief executive officers of U.S. companies with more than $7.3 trillion in annual revenue, warned last month that fiscal inaction “is stifling business investment and hiring.” Small business optimism fell in November to the lowest level since March 2010, according to the National Federation of Independent Business’s optimism index released yesterday.
Spending on business equipment and software dropped at a 2.7 percent annual rate from July through September, the worst performance since the three months to June 2009, when the recession ended, according to Commerce Department data.
The pattern of orders for capital equipment, a proxy for future business investment, makes blaming the drop in business investment on fiscal-policy concerns “less compelling,” said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York.
Bookings in June and July, before concern reached fever pitch, showed the biggest back-to-back drop since the two months ended January 2009, during the depths of the recession. They then stabilized in the next two months and climbed in October, just as the budget debate intensified. That indicates something else, such as the slowdowns in Europe and Asia, was behind the earlier slump, he said.
“We think we’ve turned the corner and the global economy will modestly improve, which should support capital expenditures,” Feroli said.
Spending on equipment and software will increase at a 3 percent pace in the fourth quarter and show a 10 percent advance in the second half of 2013, according to a forecast by Dean Maki, chief U.S. economist in New York for Barclays Plc.
“Corporations have plenty of cash on their balance sheets,” said Maki, who worked for the Fed from 1995 to 2000. “They do have scope to increase capital spending.”
Apple, the world’s largest company by market value, plans to spend more than $100 million next year on building Mac computers in the U.S., shifting a small portion of manufacturing away from China. “We’ll be investing our money,” Chief Executive Officer Tim Cook said in an interview with Bloomberg Businessweek.
At Starbucks, the world’s largest coffee-shop operator, spending will rise by 33 percent to $1.2 billion in the fiscal year that started on Oct. 1. “We are planning prudent growth in capital expenditures,” Chief Financial Officer Troy Alstead said at an investor meeting on Dec. 5.
Chevron, the world’s fourth-largest energy company by market value, said on Dec. 5 it plans to spend $36.7 billion on capital investments including exploration, up from $32.7 billion this year. “We’re investing in a portfolio of very attractive oil and gas projects that will deliver volume growth,” Chairman and Chief Executive Officer John Watson said.
Expansion by energy and materials companies reflects tight supply and a recovery in housing markets, said Market Securities-Kyte Group’s Barraud.
“Investment should grow in the mining sector with capacity at more than 90 percent and because the consumption of basic materials will be stimulated by the recovery of the residential real-estate market,” he said.
Banks have increased commercial and industrial loans at an annual rate of 12 percent the past two quarters, according to Fed data. Lenders have eased standards during the past three quarters, the central bank’s senior loan officer surveys showed.
There’s “an important role for credit availability in explaining investment decisions,” said Goldman Sachs Group Inc. economists in a report Dec. 5 on “drivers of capital spending.”
Pent-up demand by businesses will be released once the nervousness lessens over the impending changes in fiscal policy, said Harm Bandholz, chief U.S. economist at UniCredit Group in New York.
“The motive for investing is still there, which is a better sales outlook,” he said.
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