Capital Spending Shows Robust Growth for a Change

Boost of over 20% in first quarter, if sustained, might help lagging productivity gains.

After years in the doldrums, corporate capital spending is finally on the upswing. For S&P 500 companies, spending on factories, equipment, and the like jumped by some 22% to $167 billion in 2018’s first quarter.

This surge comes as welcome news after many years post-crisis where capital expenditures were piddling or even negative. If the pace can be sustained, the federal figures suggest, it should help lagging productivity growth, which advanced just 1.2% in 2017’s fourth quarter. Productivity gains were routinely around 3% yearly in the late 1990s, and lately have come in at around 1%.

 The reasons for the uptick in capex, said John Lynch, chief investment strategist for LPL Financial, are “strong earnings growth, corporate tax cuts, immediate expensing of capital investments, repatriation of overseas cash, high business confidence, and deregulation.” A number of these, of course, are courtesy of the Trump administration. LPL believes the capex boost is sustainable.

For a long time, corporate managers shied away from strong capex for fear that demand for their products was insufficient to justify the outlays. Now, though, the semiannual Institute for Supply Management poll finds that manufacturers plan to boost capital spending by 10% this year overall. Companies say they will spend 8.3% more on technology in 2018, a Duke University/CFO magazine survey contends.

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And one of the prime sectors intent on doing a lot of capital spending is technology itself. Its healthy profits—and heady stock market performance, leading the pack at 11.3% in the first half—demonstrate why.

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