Business Investment Fizzles Out

November 30th, 2015 9:52 pm | by John Jansen |

Great article on the parlous state of capital spending:
By Eric Morath
Nov. 30, 2015 7:51 p.m. ET

Business investment across the U.S. is fizzling out.

Companies appear reluctant to step up spending on the basic building blocks of the economy, such as machines, computers and new buildings. The broadest measure of U.S. business investment advanced 2.2% from a year earlier in the third quarter, the Commerce Department said last week, marking one of the worse performances of the six-year-old economic expansion.

Other measures show an even gloomier picture. A gauge of capital expenditures—orders for nondefense capital goods excluding aircraft—declined 3.8% through the first 10 months of the year compared with the same period in 2014, according to government estimates.

Weak investment restrains economic output, one key reason the economy has struggled to grow faster than 2% in recent years. The weakness also saps the economy’s future potential. Capital expenditures are an important ingredient in improving employee productivity, which has grown at an anemic pace in recent years but is critical to workers’ wages and corporate profits.

Many factors have conspired to limit growth in investments during this economic expansion. Businesses hesitated to commit to projects amid uneven consumer demand and concerns about the regulatory environment. Thousands of firms have decided to bolster share prices by spending money on stock buybacks and dividends, rather than plow funds back into facilities and equipment, moves that would boost worker productivity and eventually wages.

Some analysts say the buybacks are evidence companies see little prospect of achieving good returns through capital investments.​

Among companies in the S&P 500 index, share buybacks were up 10.4% in the third quarter compared with a year earlier and are up more than 80% from a decade ago, according to S&P Dow Jones Indices.

At the same time, an elevated unemployment rate for several years after the recession meant a supply of relatively inexpensive workers, possibly an incentive for businesses to spend on labor rather than capital. Even as the unemployment rate falls, slack remains in the labor market, shown by soft wage growth and a historically low share of Americans, 62.4% in October, participating in the workforce.

More recently, a stronger dollar and falling commodity prices are sowing caution among a wide swath of companies. A string of big mergers have also led to consolidation over investment-based expansion.

Kraft Heinz Co. in early November said it would close seven North American plants as part of its plan to cut $1.5 billion in costs following the merger of H.J. Heinz Co. and Kraft Foods Group Inc. At the same time, the company also said it would increase its quarterly dividend by 4.5%.

The ​consolidation “will eliminate excess capacity and reduce operational redundancies, making us more competitive,” said Chief Financial Officer Paulo Basilio on the November call with investors. The company said it plans to invest in modernizing other facilities.

The industries pulling back range from retailers and manufacturers to energy companies and some services firms.

Macy’s Inc. plans to close 35 to 40 stores early next year, joining J.C. Penney Co. and Abercrombie & Fitch Co. among retailers announcing cutbacks this year.

Diesel engine-maker Cummins Inc. attributed a recent sales slump to more than a slowdown in overseas markets and a pullback in the domestic-energy industry. The company said a decline in capital spending by data-center operators in North America hurt its power-generation business. As well, weaker demand slowed sales of equipment to construction companies.

“We have already taken a number of actions to reduce costs across the company,” Chief Executive Tom Linebarger told investors in late October. With “no clear signs of improvement in the near-term, we are now implementing additional restructuring,” which includes 2,000 layoffs and a widespread review of manufacturing capacity.

Storeroom Solutions Inc. Chief Executive Carlos Tellez said his customers, ranging from medical-device manufacturers to large universities, are growing more cautious. The Radnor, Pa., company sells systems to organize and manage supplies.

Since the recession, “we saw people come back little by little, but 2015 has gone in the other direction,” he said. “There is a lot of nervousness about where demand is going.”

During the most recent recession, the decline in business investment was far deeper than any experienced since the Depression. But the ensuing rebound was more tepid than other bounce backs. Capital expenditures, excluding aircraft and defense, grew at a better than 10% annual rate in the first two years of the expansion, but have eased significantly since.

Just over a year ago, business investment appeared poised for a breakout. Economic growth had accelerated in the middle of 2014, hiring was strong and the Federal Reserve had interest rates pinned near zero.

Instead, the pace of investment slowed. A harsh winter weighed on demand and shipments. The slump in oil prices caused investment in what had been a fast-growing energy industry to collapse. A strong U.S. dollar weighed on corporate profits and led many companies to hunker down. And weak prices for other commodities—from metals to grains—stung sectors ranging from steel to agriculture to mining.

Many economists expected investment to rebound in 2016 as those factors fade. But fresh headwinds loom, such as an escalating war in Syria, worries about terrorist attacks, rising interest rates in the U.S. and a holding pattern ahead of the U.S. presidential election.


Categories of investment stung by falling oil prices and the stronger dollar were hammered especially hard over the past year. Spending on mining and oil-field equipment fell 46% from a year earlier in the third quarter. Outlays on railroad equipment, to move the oil, fell even more sharply. Spending on farm tractors declined 42%.

“Because of the market demand, we do not need to add capacity now,” said Martin Richenhagen, chief executive of farm-equipment maker AGCO Corp. , which has plants in Kansas, Minnesota and Illinois.

A bumper crop combined with weak global demand caused prices for food commodities to fall. That hurt farm incomes, curtailing demand for the tractors and other machines the company produces. The market for farm equipment is down about 30% from its 2013 peak, Mr. Richenhagen said, “so you can imagine that you then don’t invest in capacity.”

Gregory Daco, an economist at Oxford Economics, expects capital investment to remain sluggish. Domestically oriented companies will need to spend more, but weak global growth will slow investment from export-driven firms and their suppliers, he said.

“If businesses are not investing in new capital, that contribution to potential growth is falling,” Mr. Daco said. “That is one of the factors that could push us into a slow-growth environment for longer.”

That’s a concern because policy makers, including Fed Chairwoman Janet Yellen, are looking for stronger productivity gains to support better wages growth, and ultimately, reinforce demand.

Write to Eric Morath at

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