Capital spending is the lifeblood of corporate success, but the corpuscles have been flowing slowly lately. Don’t expect much improvement this year.
According to the Conference Board, corporate capital expenditure should inch along at a 1.0% growth rate in 2020, down from 2.3% last year and 6.4% in 2018. After this year, though, the research group believes that cap ex will pick up, along with the overall economy, which has been slowing the past couple of years amid weakness in the manufacturing sector.
The Conference Board anticipates that “the decline in industrial production to ease and eventually bottom out which should lead to improvements in business sentiment and bolster business investment.”
With the US economy growing at only slightly more than 2% post-recession—it expanded 2.3% last year—the appetite among companies to spend heavily on capital goods has been tempered. Certainly, capital spending has sprung back from a slump during the Great Recession, as well as a smaller downdraft amid the 2015-16 mini-recession, induced by a spectacular plunge in oil prices.
Last year, though, cap ex (defined as nondefense capital goods orders excluding aircraft) has taken an erratic path. It was down in four of 2019’s months, with the last drop in December, of almost 1%.
Some of the 2019 trouble came from the General Motors strike and the grounding of the Boeing 737 MAX. Rising labor costs haven’t helped.
The good news is that GM is back to work again, although auto sales are weak worldwide, and the US-China trade war is called off, at least for the moment. At some point, the MAX should return to the air. As Boeing’s largest product, the ending of its production has hurt both the company and the economy.
Nevertheless, the Conference Board projects that consumer spending, which has been the sparkplug of the economy for several years, should soften in 2020 because of a decline in personal income growth. The organization’s report didn’t mention the coronavirus pandemic, which could really harm the global economy.
That said, a turnaround among emerging markets, if not in the developed world, could aid limping US industrial output, as well as the trade war truce.