Surging U.S. Corporate Spending May Offset Sequestration
Companies in the U.S. are beginning to empty their deep pockets and boost capital spending as they look past the specter of sequestration and global growth risks.
Orders for capital goods excluding aircraft and military equipment -- an indicator of future business investment -- increased 1.5 percent in May, a third consecutive advance and the longest streak since October 2011. Chief executive officers are more optimistic about the economy, based on the Business Roundtable’s quarterly outlook index, which rose to 84.3 in the second quarter, the highest in a year.
Spending on information technology is up 4 percent this year compared with 2 percent last year, according to the median in a survey of 203 businesses by Computer Economics, a research company in Irvine, California -- helping businesses such as Microsoft Corp. (MSFT)
“Investment will pick up in the second half of the year,” driven by strength in housing and the automobile industry, said Yelena Shulyatyeva, a U.S. economist in New York at BNP Paribas. “For companies to start really benefiting, to be profitable in the future, they need to invest.”
Discount retailer Family Dollar Stores Inc. (FDO), which operates solely in the U.S., is opening 500 new outlets this year, and Rite Aid Corp. (RAD), a U.S. pharmacy chain, is remodeling 400 locations in fiscal 2014. Pier 1 Imports Inc. (PIR) plans $75 million in capital expenditures, including on stores and technology, Chief Financial Officer Charles Turner said during a June 20 conference call.
“We’ve got to start investing in now, so we can be ready for what traffic we’re expecting” in fiscal 2016, Alan Graf, chief financial officer of Memphis-based FedEx Corp. (FDX), said on a June 19 conference call. The world’s largest cargo airline plans to spend about $4 billion on capital goods in fiscal 2014, including for facilities and aircraft, while investments for its ground-shipping subsidiary also will climb for the “next several years” to meet growing demand, Graf said.
Such increases are set to bolster the U.S. expansion between now and year-end as companies unleash cash from their record-high balance sheets amid a brighter economic outlook. Job gains that beat expectations in June have helped firm market projections of a September start for the Federal Reserve to begin reducing its unprecedented $85 billion in monthly asset purchases, indicating confidence that growth is sustainable without record levels of monetary stimulus.
Shulyatyeva projects capital expenditures will accelerate at a 6.9 percent annualized pace in the third quarter and 7.6 percent in the fourth after growing 4.4 percent in the three months ended June 30. The increase was only 0.1 percent in the first quarter, as federal budget cuts and tax increases weighed on the private sector.
Gross domestic product rose 1.8 percent in January-March. BNP economists estimate it will reach 2.4 percent in the final three months of the year after 2.2 percent in the third quarter and 1 percent in the second.
Technology stocks are starting to reflect the optimism. The Guggenheim Standard & Poor’s 500 Equal-Weight Technology Exchange-Traded Fund is up 23 percent this year compared with a 21 percent rise for the Guggenheim S&P 500 Equal-Weight ETF. (RSP) The strong housing outlook has helped push the S&P 500 Homebuilding Index up 37 percent in the past year as the broader S&P gained 24 percent.
Increased spending on technology equipment probably will prove a boon for Redmond, Washington-based Microsoft, navigation device-maker Garmin Ltd. (GRMN) of Switzerland and Cognizant Technology Solutions Corp. (CTSH), which reap the majority of their revenue in North America. Microsoft boosted investment by 24 percent and Garmin by 102 percent during the past year. Cognizant, a provider of technology-consulting services based in Teaneck, New Jersey, increased spending by 19 percent in the same period.
The Federal Reserve Bank of San Francisco’s Tech Pulse Index, which tracks the health of the U.S. IT industry, is showing an improvement in investment, consumption, employment, industrial production and shipments, rising to 98.96 in May, the highest since August 2008.
“A lot of these companies are sitting on lots of cash and trying to figure out what to do with it,” said Richard Gordon, a researcher of global IT-market forecasting for Gartner UK Ltd. in London.
Businesses have been hoarding funds in the aftermath of the recession, with nonfinancial liquid assets reaching a record $1.78 trillion in the first quarter.
Gauges of corporate confidence also are climbing. The Morgan Stanley Business Conditions Index jumped to 71 percent in June, the strongest since January 2011 and matching the largest one-month increase. The Conference Board’s measure of CEO confidence increased to 62 in the second quarter, the highest since the first quarter of 2012, from 54 in the prior three months. A reading above 50 indicates more positive than negative responses.
Rising employment reflects the improvement. Payrolls increased by 195,000 in June for a second straight month, the Labor Department reported July 5, capping 12 consecutive months of gains above 100,000 -- the longest such streak since the 33 months ended in May 2000.
Capacity utilization, a measure of efficiency that averaged 74.5 during the recession, was at 77.6 in May, indicating companies across all industries may be forced to spend more to keep up with demand.
Businesses will need to accelerate the pace to surge above pre-recession levels, however. Nonresidential investment, including in equipment and software as well as structures such as office space, fell by $376 billion between the fourth quarters of 2007 and 2009 and has since climbed $308 billion.
Capital-goods orders slowed last year, declining 4.7 percent in December from a year earlier after rising 9.2 percent in the 12 months ended in January 2012. The outlook for 2013 is “okay, but not great,” with orders “trending along in the mid-single-digit range, which is not exceptional,” said Michael Carey, chief economist for North America at Credit Agricole CIB in New York and the top forecaster of GDP growth for the two years ended in May, according to data compiled by Bloomberg.
Carey sees the economy expanding 1.3 percent in the second quarter, 2.4 percent in the third and 2.9 percent in the fourth.
For businesses to make bigger capital investments, they’ll need to see more strength in consumer demand and sales, which have been “a little uneven,” Carey said.
Retail sales rose 0.4 percent in June, less than forecast, as demand cooled at building-materials outlets and restaurants. The gain followed a 0.5 percent increase in May that was lower than previously reported, Commerce Department figures showed today in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 0.8 percent advance.
Some companies are sharing extra cash on hand with shareholders. Atlanta-based home-improvement retailer Home Depot Inc. (HD) said in February it would increase its dividend to 39 cents a share from 29 cents. Time Warner Cable Inc. (TWC) in New York, the second-biggest U.S. cable system, announced in January a boost to 65 cents from 56 cents.
Another potential obstacle to corporate spending is the prospect for budget gridlock as the U.S. Treasury approaches its $16.7 trillion borrowing limit and Congress negotiates fiscal 2014 spending. World economic growth is also a consideration. The International Monetary Fund trimmed its forecast for a fifth consecutive time July 9 to 3.1 percent this year, unchanged from the 2012 rate and less than its 3.3 percent April forecast.
Even so, gains in the U.S. housing and auto markets that persisted through a weak first quarter have come amid rising consumer confidence, encouraging businesses to spend. Consumer sentiment held near a six-year high in June, according to the Thomson Reuters/University of Michigan gauge, and the Bloomberg Consumer Comfort Index climbed in the week ended July 7 to the highest since January 2008.
Even as mortgage rates rise from record lows, the economy is less interest-rate-sensitive as households have repaired their balance sheets and home affordability has surged, said Ted Wieseman, an economist at Morgan Stanley in New York. The average for a 30-year fixed-rate mortgage was 4.51 percent in the week ended July 11, the highest in almost two years, compared with 3.31 percent in November, the lowest in records dating to 1972, according to data from Freddie Mac.
Automakers that typically would be closing shop this month for annual retooling are either shortening or canceling the shutdowns because of increased demand. Cars and light trucks sold at a 15.9 million seasonally adjusted annualized rate in June, the strongest since November 2007.
Most of Ford Motor Co. (F)’s North American assembly plants are idling for one week this summer instead of two, increasing production by about 40,000 cars and trucks, the company said May 22. Three of Auburn, Michigan-based Chrysler Group LLC’s assembly plants and all except one of its engine, transmission and stamping factories are skipping a summer shutdown this year, the automaker said.
The abbreviated and canceled shutdowns show automakers are “really ready to invest in capacity, invest in production,” Shulyatyeva said. Capital expenditures at Ford, based in Dearborn, Michigan, already have surged by 36 percent in the past year, based on data compiled by Bloomberg.
Family Dollar executives plan to spend between $750 million and $800 million on capital goods this fiscal year, including on new stores.
“While the current sales environment remains challenging, I believe that our future is bright and that we are making the right tactical and strategic decisions to move the business forward,” Michael Bloom, president and chief operating officer, said on a July 10 conference call.