Companies Might Be Getting Weak in the Knees on Capital Spending

Companies have many reasons to continue to ramp up their capital spending, but right now, they may also be facing a major obstacle: the stock market.

Figuring out ways to run operations more efficiently is almost always a good idea, but lately, the potential profits have been particularly high. The tight U.S. job market has made it harder for companies to recruit new workers and has increased labor costs. Investing in new plants and equipment can make existing employees more productive, help ease hiring tensions, reduce labor cost pressures, and maintain profit margins.

Meanwhile, shortages and production difficulties are seen as reasons to step up investment to make the supply chain stronger. Unstable geopolitics can also be a reason to build a little more domestic manufacturing capacity.

And in fact, capital spending has increased at a fairly rapid rate since mid-2020. It increased at an inflation-adjusted 9.2% annual rate in the first quarter, according to the Commerce Department. However, there have been a few worrying signs lately.

The Commerce Department said on Wednesday that orders for meaningless capital goods, which do not include airplanes – which economists use as a proxy for capital spending – rose only 0.3% in the year. April from a month earlier, after rising 1.1% in the previous month. Taking inflation into account, that could be seen as a drop.

Orders figures, it should be noted, can be wildly variable and Jefferies economists point out that continued semiconductor shortages could cut orders. But some recent regional reports also suggest more caution may be applying to capital spending plans.

In its May survey of manufacturers in its region, the Federal Reserve Bank of Philadelphia reported that 27% of respondents said they plan to increase capital spending over the next six months, compared with 17.4% who said they plan to reduce spending. That still counts as a net positive for investment, but in April only 6.5% of respondents said they plan to reduce capital spending. While not so obvious, a survey of manufacturing by the Federal Reserve Bank of New York also showed expectations of falling capital spending.

Worries that the Federal Reserve could slow the economy too much may prompt some companies to think twice about increasing capital spending. Some of those who benefited from the pandemic may have realized that a change in spending that they thought was permanent is not, and are now reevaluating their spending plans.

The stock market roadmap could be the biggest problem. It’s easier to justify ramping up capital spending when your stock’s price is hitting new highs than when it’s plummeting. Bank of America reports that for the first time since the pandemic, its survey of global fund managers shows that investment professionals want to see companies spend money on liquidity. shareholder payments and debt repayment rather than capital expenditures.

Even if the current business environment gives them a reason to continue expanding capital spending, a troubled stock market could make some companies reluctant to play along.

The sell-off continued to beat the major US stock indexes, with the S&P 500 index entering bear market territory for the first time on Friday in more than two years. WSJ’s Caitlin McCabe looks at some of the key drivers behind market volatility. Photo: John Minchillo / Associated Press

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Appeared on May 26, 2022, print edition titled ‘Companies Seem To Be Worried About Spending Capital.’ Companies Might Be Getting Weak in the Knees on Capital Spending

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