What Spending Slowdown?
When is a slowdown not a slowdown? On the face of it, the government's statistics tell a very convincing story about cautious companies and weak business investment. For example, so far in 2007 new orders for nondefense capital goods, such as computers, trucks, and machinery, are barely higher than they were a year ago, an omen, perhaps, of tough times ahead for corporate profits.
There's only one problem. Corporate America is still spending big time, just increasingly outside the U.S. A BusinessWeek analysis of financial reports from more than 1,000 large and midsize U.S.-based companies shows that global capital expenditures in the fourth quarter of 2006 were actually up 18.1% over the previous year, a number that includes nonresidential construction as well as info-tech equipment and machinery. The comparable growth for domestic business investment, which is all the government reports each quarter: only 8.9%, without adjusting for inflation.
So far in 2007, U.S. corporations seem to be keeping up the global spending pace. Alcoa Inc. (AA ), which reported first-quarter earnings on Apr. 10, boosted capital spending by 32% over a year earlier, in part to fund the construction of the company's new smelter in Iceland, as well as investment projects in the U.S., Brazil, Russia, and China. And Boise (Idaho)-based Micron Technology Inc. (MU ) spent almost $1 billion more in the first quarter of 2007 than it did a year earlier: The semiconductor maker developed new plants in China and Singapore and expanded capacity at existing facilities in Virginia and Utah.
Welcome to the global economy, Mr. Statistician. Government measures were well-suited for the 1950s and 1960s, an era when U.S. companies mainly invested at home, and imports and exports were a relatively small portion of the economy. Even as corporations stepped out into the world, most of them still did the bulk of their capital spending at home. So government investment numbers remained an accurate gauge of corporate health.
Today, however, virtually every major company is trying to reduce costs and get closer to fast-growing markets by spreading manufacturing operations and research facilities around the world. As a result, a U.S.-centric view of capital spending, says Steven R. Appleton, CEO of Micron, is "almost meaningless."
Still, it's hard to wrap your mind around the implications of a world where U.S.-based companies make more and more of their investments overseas. Whether they are going abroad to chase customers or to seek out the skilled workers they need, American companies no longer depend on capital spending at home. "I don't have to hire one more person in the U.S.," says Appleton. "I don't have to invest one more dollar here--and we'll be just fine."
Appleton's sentiment is particularly striking, since Micron invested 100% of its capital spending domestically as recently as the late 1990s. But plenty of other companies are making the shift abroad as well.
For example, 3M (MMM ) expects to spend about $1.5 billion in cap-ex in 2007, up about 25% over last year. Out of 18 new plants or major expansions in the works, only seven are in the U.S. Four are brand-new facilities in China, with others in India, Korea, Poland, and elsewhere.
Or take Commercial Metals Co., (CMC ) an $8 billion steel company based in Irving, Tex. In 2003 it bought a steel mill in Poland, where it makes wire rod and other products to sell in Eastern Europe, one of the hottest construction markets in the world. This fiscal year, says William B. Larson, chief financial officer, Commercial Metals will double its capital spending in Poland, helping drive a 49% increase in global capital spending in the company's second fiscal quarter, which ended in February. What's more, the company is currently bidding on two mills in Croatia and looking for more investments in Vietnam.
In some cases, expansion overseas can coexist with increased investment at home. In 2006, Sealed Air Corp. (SEE ), a $4 billion maker of Bubble Wrap and other packaging products, based in Elmwood Park, N.J., boosted capital spending by 73%, in part to fund projects in Brazil, Russia, and China. The goal, says CEO William V. Hickey, was to "align global production capabilities with growth." At the same time, however, the company's North American investment more than doubled.
What does all this mean? In part, the gap between the corporate and the government numbers may reflect differences in the sorts of companies being counted. The government estimate for capital spending covers all businesses, down to the corner grocery store. It also includes investment in the U.S. by foreign companies, such as Toyota, which can be big spenders. Moreover, the corporate numbers are subject to the vagaries of financial accounting, which tend to make government statisticians a bit leery of them.
But there's a bigger point here. In the past there was a close link between the location of capital investment and jobs. When a company built a factory, that was where the jobs were going to be. In today's global economy, though, the link is not so clear. An expensive data center in Oregon, say, costing hundreds of millions of dollars, can support workers in India. An investment in database software in Texas can run a supply chain that starts in Taiwan. And new freight planes bought in the U.S. by companies such as FedEx Corp. (FDX ) can help speed high-value exports from China.
It's not even clear there's a close connection between the amount that companies spend in the U.S. and the health of the country's capital-goods makers. Twenty-five years ago, virtually all the equipment and machinery used by domestic businesses were made in the U.S. In 1980 imports accounted for only 17% of domestic business spending on equipment and machinery, outside of trucks and cars.
Today imports equal 66% of U.S. capital spending on non-motor-vehicle equipment and machinery. Even more mind-boggling, exports of capital goods from the country are just as big as the imports.
The bottom line: If a company is investing in the U.S., there's a good chance it's buying computers or some other piece of machinery made overseas. And if a piece of capital equipment, such as construction machinery, is made in a U.S. factory, there's a good chance it will end up being shipped abroad--perhaps even to help build a factory for a U.S.-based company that is expanding in another country.
If this all makes your head spin, you are not alone. The big divergence between domestic and global capital spending is a sign that the process of globalization has shifted into a new stage, and it's hard to know what's going to come next.
Mandel is chief economist for BusinessWeek