ILMA Compoundings April 2017 - 36

BUSINESS HUB

Capital Expenditures:

Business spending is bound to
increase economic activity
By Murray Carter
One of the key drivers of a country's gross domestic product
(GDP) and productivity is the
amount it spends on capital stock
- the machinery, equipment and
buildings used to create goods
and services. Since the Great
Recession, corporate America has
been under-investing in its capital
stock, which has led to significant
pent-up demand across many
economic sectors. This provides a
source of future economic growth
and investment opportunities,
as capital expenditures (CAPEX)
improve over the coming years.
Here is a look at the industries
and stocks that stand to benefit
from improving CAPEX.
AGING EQUIPMENT AND WEAK
PRODUCTIVITY
The five-year growth rate of U.S.
capital stock has dropped to the lowest
level in the post-World War II era, and
the average age of the capital stock is
getting close to the previous two peaks
- indicating that pent-up demand
for capital spending exists. This lack
of spending now seems to be showing
up in U.S. productivity data, with the
most recent peak occurring around
1999-2000, a time of peak capital
spending and new equipment. With
the exception of the 2009-10 timeframe (when only the most productive
workers were employed), productivity
has been drifting lower toward the
current cycle lows.

36

APRIL 2017

| COMPOUNDINGS | ILMA.ORG

CORPORATE AMERICA IS
WELL-POSITIONED TO SPEND
While aging equipment, low spending
levels and waning productivity are
indicators of the need for increased
CAPEX, corporate America is wellpositioned to execute CAPEX plans.
CEO confidence has dramatically
improved since the Great Recession,
profitability is at all-time highs and
corporations are flush with cash.
Corporate debt financing remains very
reasonable, the cost of equity capital
has declined and fiscal (tax and regulation) uncertainty has improved. All of
this makes it much easier for managers
to give the green light to major corporate expenditures.
HEALTHY BANKS ARE INCREASING
THEIR LENDING
The banks are in great shape to provide credit for businesses at favorable
financing conditions and are now

doing so. Recent Federal Reserve
quarterly surveys of senior loan officers
show a broadly based increase in the
demand for bank credit, while lending
standards continue to ease from
the very tight conditions that have
existed since the 2008 financial crisis.
Commercial and Industrial (C&I)
business loan demand is rising sharply
- for large firms as well as small and
medium enterprises - while loan
officers are reporting stronger financing demand related to investment in
plants and equipment.
DE-LEVERED CONSUMERS ARE
GAINING CONFIDENCE - AND
HAVE PENT-UP DEMAND
A healthy consumer is critical for
increased consumption of goods
and services produced by corporate
America. Consumers have de-levered,
as the housing and financial market
recoveries have restored consumer balance sheets to a much better state. Net


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ILMA Compoundings April 2017

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