WSJ: Companies Neglect Capex, and That Might Hurt the Economy

Thursday, 04 Sep 2014 11:20 AM

By Dan Weil

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U.S. companies, especially manufacturers, are emphasizing acquisitions and stock buybacks over capital expenditures. And that might put a damper on the economy.

"Even as economic indicators rise, domestic capital spending has remained anemic by historical standards, especially in manufacturing," writes James Hagerty of The Wall Street Journal.

"In contrast, companies have spent heavily on acquisitions and stock buybacks. That choice could hobble efforts by U.S. firms to compete more effectively with foreign rivals in the years ahead."

Editor’s Note:
New Warning - Stocks on Verge of Major Collapse

Corporate capital spending climbed a paltry 3 percent last year, compared with a long-term average of more than 8 percent, according to Morgan Stanley. As a result of the trend, U.S. industrial equipment has an average age of more than 10 years, the highest since 1938.

Meanwhile, industrial companies doled out $80.7 billion in the first half of the year for acquisitions, the highest amount since 1999, according to Dealogic, The Journal reports.

And geopolitical turmoil may limit capital spending further, Hagerty says.

However, Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, a research organization, believes capital spending will increase. "We've postponed investment for so long that it almost has to occur," he tells The Journal. In addition, Meckstroth noted, many of the companies making acquisitions will need to make capital investments that previous owners didn't make.

Jan Hatzius, chief economist of Goldman Sachs, has a mixed view on capital spending. On one hand, it appears that the real capital stock is expanding at a 2 percent rate, he says in a report obtained by Business Insider.

"Since this is no longer far below potential GDP growth, it seems that the fundamental argument for big increases in capital spending has weakened considerably."

But on the other hand, Hatzius predicts capital spending will rise at a 5 percent pace by 2015 to 2016.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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