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US Capital Spending Plummets To Recession Levels

Tyler Durden's picture




 

Back in April, we did an extensive analysis of what, in our opinion, is the primary reason for the slow burn experienced by the US, and global economy, and why virtually every liquidity pathway used by central banks is hopeless clogged: the complete lack of capital expenditures at the corporate level, and lack of (re)investment spending. Specifically we said that in both the context of Japan's plunging corporate profitability over the past 30 years despite year after year of record budget deficits, and its implications everywhere else, that "we get back to what we have dubbed the primary cause of all of modern capitalism's problems: a dilapidated, aging, increasingly less cash flow generating asset base! Because absent massive Capital Expenditure reinvestment, the existing asset base has been amortized to the point of no return, and beyond. The problem is that as David Rosenberg pointed out earlier, companies are now forced to spend the bulk of their cash on dividend payouts, courtesy of ZIRP which has collapsed interest income. Which means far less cash left for SG&A, i.e., hiring workers, as temp workers is the best that the current "recovering" economy apparently can do. It also means far, far less cash for CapEx spending. Which ultimately means a plunging profit margin due to decrepit assets no longer performing at their peak levels, and in many cases far worse." Today, with the usual six month or so delay, this fundamental topic has finally made the mainstream media with a WSJ piece titled "Investment Falls Off a Cliff: U.S. Companies Cut Spending Plans Amid Fiscal and Economic Uncertainty."

The WSJ is correct in its observations - capital spending (so very needed to replenish an aging asset base and to fund future revenue growth) has indeed plunged, however it is dead wrong in its diagnosis - it has little to do with the "cliff", as this has been a trend that has been far longer in the making than just the past few months, and everything to do with the Fed's control of virtually every market, and its ongoing encroaching control of the capital flows (so far miserably failing) of the economy, which in turn means companies are eager to spend cash on immediate IRR opportunities such as dividends, stock buybacks, and to a lesser extent M&A, than on longer-term, higher IRR, but less immediate bang for the buck opportunities, such as capital reinvestment. This will, sadly, continue until the breaking point is reached and there is no more revenue growth (such as Q3, when Y/Y revenue has finally turned the corner, even if there is still some more SG&A fat to be cut). At that point expect the mainstream media to once again, realize just what the true nature of the problem is, with its usual 6-12 month delay.

In the meantime, here is the pretty WSJ chart proving the collapse in CapEx:

Readers will recall that all of the above was noted a month ago, when we noted the gaping divergence between corporate and consumer outlooks in "What Do CEOs Know That The Consumer Doesn't?"

As for the WSJ's stark awakening on the CapEx reality, here is some of their narrative, where everything is, for now, the Fiscal Cliff's fault:

U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

 

Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

 

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined.

 

At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms' expansion plans.

 

Corporate executives say they are slowing or delaying big projects to protect profits amid easing demand and rising uncertainty. Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear. It is unclear whether Washington will avert the so-called fiscal cliff, tax increases and spending cuts scheduled to begin Jan. 2.

 

Companies fear that failure to resolve the fiscal cliff will tip the economy back into recession by sapping consumer spending, damaging investor confidence and eating into corporate profits. A deal to avert the cliff could include tax-code changes, such as revamping tax breaks or rates, that hurt specific sectors.

The only thing we would add here is that we are eagerly looking forward to the WSJ's follow up piece some time in mid-2013, when it observes investment spending in the aftermath of the "resolved" Fiscal Cliff, and notices that the collapse in CapEx has continued.

Just what will the ongoing unwillingness to reinvest in one's business, and to dividend as much of the cash on hand as possible to shareholders, be blamed on then?

 

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Mon, 11/19/2012 - 11:24 | 2995834 ebworthen
ebworthen's picture

The Casino is in fine form this morning.

Intel not opened for trading until insiders can liquidate their positions.

Companies cutting employees, spending, research; but the markets go up.

Peanuts!  Popcorn!  Cotton Candy!  When will Ben the Ringmaster Bernanke announce QE4?

Mon, 11/19/2012 - 11:26 | 2995837 dwdollar
dwdollar's picture

"When will Ben the Ringmaster Bernanke announce QE4?"

Not until all the insiders are in...

Mon, 11/19/2012 - 11:34 | 2995863 GetZeeGold
GetZeeGold's picture

 

 

The gift of QEeternity (TM) is we don't have to release which version we're on.

Mon, 11/19/2012 - 12:34 | 2996036 JPM Hater001
JPM Hater001's picture

Unlike Microsoft, Ben's QEeternity (TM) became the platinum brand.  No others need apply.

Mon, 11/19/2012 - 17:21 | 2996926 sgt_doom
sgt_doom's picture

No offense to TD, but I love this blog posts; hilarious!!!

They ship all the jobs, all the technology and all the investments to China and India, then there's always some moron who pipes up:

"They're doing it so we can stay competitive with India and China????"

(will all you jackholes who say this please fully identify yourselves?)

Good comments, BTW.

Mon, 11/19/2012 - 11:29 | 2995850 css1971
css1971's picture

Wait... I thought QE3 was for eternity.

Mon, 11/19/2012 - 11:35 | 2995873 MFLTucson
MFLTucson's picture

Of course it is, it was overdue, time for the courrpt Wall Street gang to get out and leave the American people holding the bag!  No war in middle east, no fiscal cliff, positive GDP in Europe, Japan and the US (LOL), Obama knows what he is doing, corprotae profits in the tank, taxes up the ass in 2013 but who cares, this is about valuation, yes, the valuation of the Bernanke printing press and the realization that John Bonier will sell out the Republican party.

Mon, 11/19/2012 - 11:25 | 2995835 rtalcott
rtalcott's picture

What does Samsung's CapEX look like?

Mon, 11/19/2012 - 11:47 | 2995895 adr
adr's picture

irrelevant if you don't live in Seoul.

Mon, 11/19/2012 - 12:37 | 2996044 JPM Hater001
Mon, 11/19/2012 - 16:38 | 2996787 Jam Akin
Jam Akin's picture

That is what the 21st Century edition of Robert Palmer's band would look like if he were still around...

Mon, 11/19/2012 - 11:27 | 2995838 vote_libertaria...
vote_libertarian_party's picture

Sooooooooo, what you are saying is that all of the companies are just sitting on cash waiting for President Rubio to come to office and...

Mon, 11/19/2012 - 11:28 | 2995844 ItsDanger
ItsDanger's picture

It really has to do with a mature marketplace.  Only more competition from new players or new products can cure this.  On pt 1, with the oligarchies in place, not likely.  On pt 2, maybe 5-8 yrs from now.

Mon, 11/19/2012 - 11:32 | 2995858 MFLTucson
MFLTucson's picture

The Obama affect!

Mon, 11/19/2012 - 11:51 | 2995901 Future Jim
Future Jim's picture

CEO's aren't spending because they want to make the brilliant young man look bad - because they are racist. /sarc

Mon, 11/19/2012 - 11:35 | 2995867 foodstampbarry
foodstampbarry's picture

FORWARD!!!

Mon, 11/19/2012 - 11:34 | 2995868 SheepDog-One
SheepDog-One's picture

Wow, highly bullish I'm sure, or something.

Mon, 11/19/2012 - 11:39 | 2995877 adr
adr's picture

No, it can't be true. EVERYONE is out buying newly built McMansions to support the stock level of Pulte, eating Red Lobster every night to support Darden stock, eating Chipotle for lunch, buying an extra two iPads to back up the two they already bought, while keeping Netflix running on six devices at once, and buying everything they can on Amazon.

THE STOCK MARKET ISN'T OVERBOUGHT, IT SHOULD BE 26548% HIGHER!!!!!!

We don't need real data when the newly minted myths of legend can support any stock valuation an analyst shoots from his mouth. Profit isn't even needed because people can be paid with unicorn skittles that can easily be traded for a 5000sq ft house complete with a Tesla ModelS in the garage.

Mon, 11/19/2012 - 11:41 | 2995881 sschu
sschu's picture

ObamaCare

EPA Regulations

Fiscal Cliff

Trillion $+ Deficits

Dozens of new regulations issued daily

Depression in Europe

China slowing

Japan glowing

WTI at $89, Gold at $1,700+, Corn at $7.31

War in the Middle East

 

What is wrong with these guys, why won't they invest?  We need some more laws demanding they spend some money!

sschu

Mon, 11/19/2012 - 15:04 | 2996448 Iam_Silverman
Iam_Silverman's picture

"We need some more laws demanding they spend some money!"

I can see the Bloomberg headline now:

 

Wesley Mouch selected as president's newest economic advisor.  He will be developing new rules to "assist" cash laden companies with "investing in the country's future".  When interviewed, he gave the impression that he was very excited, and "couldn't wait to get all of that cash off of the sidelines and into productive social projects".

Mon, 11/19/2012 - 11:43 | 2995885 oleander garch
oleander garch's picture

Why this insistence on ascribing investment inaction to 'uncertainty' of management?

They are not investing in their companies because they earn out better on a quarterly basis for not investing for the long haul.  That is quite certain and quite demonstrable.

Mon, 11/19/2012 - 11:47 | 2995892 Madcow
Madcow's picture

i wonder how much more of this recovery the US economy will be able to withstand - 

Mon, 11/19/2012 - 11:59 | 2995919 DaveyJones
DaveyJones's picture

 more covery than recovery

Mon, 11/19/2012 - 11:52 | 2995907 adr
adr's picture

The more I look at the climate of today the more I see we are back in the 1890s business environment. Corporations can be taken down by stock traders for no apparent reason, other than JP Morgan's wish. Monopolies are in vogue, competition is to be eliminated at all cost, and the presidency can be bought and paid for by a few select CEOs. The gap between rich and poor widening and people being forced into longer hours for less pay.

All we need is for a huge man induced natural disaster, a worker's strike put down by armed hired guns, and a president being shot.

Mon, 11/19/2012 - 11:55 | 2995911 Titus Flavius C...
Titus Flavius Caesar Vespasianus Augustus's picture

There corporations are likely holding on to their dollars in order to exchange them for Ramen and Renminbi when the C.H.U.D.s start taking over.

 

 

Mon, 11/19/2012 - 11:56 | 2995913 Rainman
Rainman's picture

Wally Mart is moving it's 4th quarter dividend payment from Jan.2 to Dec. 27th to beat the dividend tax hike. Others are issuing special dividends by year end. More front running ...no surprise. 

Mon, 11/19/2012 - 12:02 | 2995925 SheepDog-One
SheepDog-One's picture

We'll see if the employees will follow thru and strike and wreck it all for Chinamarts 'Black Friday all day Thanksgiving' BS....I'd just love to see it myself! 

Mon, 11/19/2012 - 12:00 | 2995921 SheepDog-One
SheepDog-One's picture

So we're in a recession if not depression....but the economic newses have never been better! Gee what a pile of crap people will put up with.

Mon, 11/19/2012 - 12:03 | 2995931 Spastica Rex
Spastica Rex's picture

Just givin' the people what they want.

Mon, 11/19/2012 - 12:00 | 2995923 QQQBall
QQQBall's picture

Tax cash!

 

Signed,

Obomber, Jr.

 

Mon, 11/19/2012 - 12:12 | 2995970 Dumpster Fire
Dumpster Fire's picture

Aren't we already?  ZIRP

Mon, 11/19/2012 - 12:09 | 2995952 markar
markar's picture

Can I get disability due to slow motion train wreck fatigue?

Mon, 11/19/2012 - 12:29 | 2996025 BraveSirRobin
BraveSirRobin's picture

But on a positive note, inflation, excluding the volitile food, energy, housing, transportation, and retail sectors, is quite tame.

Mon, 11/19/2012 - 12:32 | 2996030 JPM Hater001
JPM Hater001's picture

"U.S. companies are scaling back investment plans"

 

U.S. companies are stopping all investment plans

 

Fixed.

Mon, 11/19/2012 - 12:35 | 2996039 q99x2
q99x2's picture

We've reached a turning point. A hot money shelterer just bought a house. Everything is fixed. UFOs won't even let Hillary fire nukes. Life is good.

ZIRP and Change.

Mon, 11/19/2012 - 13:12 | 2996154 ejmoosa
ejmoosa's picture

The rate of year over year profit growth is not sufficient to warrant expansion in the US.  I realize all the academics believe that profit is irrelevant, but it matters.

The rate of year over year profit growth has not been this low since 2009.  And we have not even seen the true impact of Obamacare on the bottom lines yet.

2013 will see us in a recession.  The economy will once again right size itself for the economic burdens of the Federal Government that it must bear.

 

 

Mon, 11/19/2012 - 14:35 | 2996377 hawk nation
hawk nation's picture

2013 will see us in a DEPRESSION. The economy will once again right size itself for the economic burdens of the Federal Government that it must bear.

FIXED IT FOR YOU

Mon, 11/19/2012 - 13:33 | 2996212 bugs_
bugs_'s picture

American companies are going to need more toolbox carriers.  Keep that old stuff running.  The maintenance contracts will be allowed to expire.  I bought a new flashlight to make it easier to see what I am working on.

Mon, 11/19/2012 - 13:33 | 2996213 yt75
yt75's picture

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Ne pas oublier que ce projet est surtout une aberration économique (enfin pas pour Vinci certes) :
Le trafic aérien va --BAISSER-- dans les années à venir(déjà plus ou moins le cas).

Et ceci pour des raisons très banales : la crise actuelle est avant tout un monstrueux choc pétrolier, celui du pic, maximum de flux, de débit, de production mondiale de pétrole.

http://iiscn.wordpress.com/2011/05/06/bataille-et-lenergie/

Il est d'autre part extrêmement urgent, à l'heure de la propagande hystérique (dernier rapport AIE), de sortir de la légende "premier choc = embargo arabe", le premier choc pétrolier était une conséquence directe du pic de production des Etats-Unis en **1970***

Voir résumé lien ci dessus. 

Mon, 11/19/2012 - 15:08 | 2996461 Iam_Silverman
Iam_Silverman's picture

Indeed.

Mon, 11/19/2012 - 16:36 | 2996793 Jam Akin
Jam Akin's picture

Mot.

Mon, 11/19/2012 - 17:45 | 2996961 Chuck Walla
Chuck Walla's picture

Merde!

 

FORWARD SOVIETS! The New Detroit Beckons Freedom Lovers!

Mon, 11/19/2012 - 16:38 | 2996799 pitz
pitz's picture

Cue the hyperinflation -- declining investment = no new production = rising prices.  Nevermind all the money pumping that Bernanke and his band of fools will engage in to try and re-start capital investment. 

Mon, 11/19/2012 - 17:42 | 2996960 sasebo
sasebo's picture

NOW WE KNOW what the Austrians meant when they stated that the problem in the economy is MISALLOCATION of capital. Not misallocation of paper & digital fiat. The banks don't hold Capital in reserve for emergencies  ----- they hold fiat. DUH ------

So now we see what happens when the Keynesians convince the delusional asshole politicians & fed to increase demand by lowering interest rates to ZIRP & pump digital money into the stupid banks who lost their asses when they used OPM to make stupid, fraudulent real estate loans. DUH  ---------------------

With ZIRP producers don't save some of their production so entrepreneurs can use the saved production to buy new equipment & repair existing production equipment. Producers are the only ones who have anything to save. DUH --------

With ZIRP consumers borrow & buy up all production.

DUH!!!!!!!!!!!

 

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