Four Reasons Why There Is No 'Pent-Up' Capex Spend

Tyler Durden's picture

Consensus seems convinced (and short-term market prevarications suggest) that once we get past the 'uncertainty' of the fiscal cliff, then there will be a surge in pent-up spending from companies in the first half of 2013. Morgan Stanley's Adam Parker snubs the mainstream meme and looks at the data - finding four significant reasons why a surge in capital spending is unlikely. From 'average' sales-to-capex ratios and manufacturing utlization to inventory levels and the overall trend in deprecation, Parker interestingly questions whether "high capital spending is ever good?"


Via Morgan Stanley,

The consensus sees pent-up demand for capital spending from C-level executives ready to spend, but who want clarity on a number of laws that may change in the coming year. While no doubt uncertainty has weighed on corporate decision-making, we thought it might be timely to look at capital spending trends a bit more holistically. Our conclusion – a large capital spending surge is unlikely.

Is high capital spending ever good?
We analyzed the correlation between changes in capex-to-sales and prior, current and future sales growth.


If capital spending picked up in the energy sector following a fiscal compromise, that would likely be more bullish than it would be for telecom, as the former is historically associated with future sales growth, whereas the latter is generally a reaction to past sales growth. While we don’t see it as likely, a capex ramp in technology and materials is typically positive for higher sales later in the subsequent year, even if it causes a nearer-term sell-off in stocks. Generally, though, low capital spenders have usually been rewarded relative to their high-spending counterparts.


In health care and materials, higher capital spending historically has been much better than in technology or telecommunications.

Investment conclusion: Four reasons why we don’t think a large capital spending surge is likely.

1. Current and forecasted capital spending-to-sales levels: While global capital spending relative to sales is forecasted to be down in 2013, it is close to average levels over the past decade.




Four of ten sectors (utilities, materials, energy, and technology) are forecasted to have above “trend” capital spending to sales for 2013, so upside surprise is not as likely here.




2. Manufacturing utilization: While utilization levels have risen sharply from the 2008 lows, recent trends have slowed.



The steadiness of the recent decline and the ample room for higher utilization until capacity is tight suggest that a surge is not likely. Only six of 22 major industries have utilization levels above their long-term average.


3. Trend analysis: We analyzed the cyclical level of D&A expense (above the trend level) and compared it with capital spending expectations at the industry group level.




On the margin, we think staples and technology may spend more capex in 2013 than industrials and consumer discretionary stocks, relative to current expectations.


4. Inventory levels: Structurally, global inventory-to-sales has been downward sloping for years. However, over the last decade or so, inventory levels have stabilized at just less than 10% of sales.




While US inventory levels seem leaner than those outside the US, a big inventory build requiring a capacity surge seems implausible. Perhaps auto components, electrical equipment, and construction could see some build, particularly relative to communications equipment.

Source: Morgan Stanley

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Vashta Nerada's picture

Capex for 2013 has been cancelled, and managers are now sorting employees for the next round of layoffs.

Vashta Nerada's picture

Also, capex doesn't turn on a dime.  People are currently reviewing 2014 capex plans, and mostly lowering them.

centerline's picture

For most small to mid sized firms at least, I think you are right.  I work for a mid-sized firm and the last few years have been a shit storm.  We lost money, made some back, lost money again, made some back, and we are now losing money again.  Net effect is that there is no damn money for capex.  And we are going to be looking to thin the herd here early next year if we have one or two off months.  We are not forecasting much different into 2014 either.  Treading water and hoping to outlive the competition is about what it sums up to be.  Problem is that when competition panics, fees get slashed as they "buy" work just for short term cash flow.  Everyone takes a step down... and repeat.

vast-dom's picture

the Fed will monetize all difficiencies in 'average' spending.

Manthong's picture

Everybody is sitting on trillions in cash..

Unemployment will be QE'd down to 6.2% by the money masters.

What's to wait for?  Time to invest in the great economic machine!


LawsofPhysics's picture

correct, meanwhile they will print trillions more.  Go ahead, unleash that cash in search of real commodities, finished goods, and services.  I dare you.  Yes do it, all while maintaining the interest payments to your real masters.


Bloody sheep

astoriajoe's picture

I think he meant Heidelbergs when he talked about machines to invest in.

derek_vineyard's picture

cash money yields zero. inflation is zipping along.  better invest in  saomething/anyting or spend the cash money as its a loser and there is no disputing that fact <------thats the feds whole poker hand.......print, inflate, zirp and force cash to buy anything and everything to keep the ship afloat a few more years

LawsofPhysics's picture

Yes, at the breaking point now.  Going to be fun to watch the upcoming bond auctions.  Your masters want their interest, now pay up.

Canucklehead's picture

Those charts are "nice" but there is a curve in the road coming up...

In the next year or two, would you roll over soverign bonds at a lower rate?  If not, where would you invest your money?  Corporate bonds or corporate equity?  Metals?

If a fraction of the wealth currently invested in bonds is not rolled over, and finds a home in corporate debt or corporate equity, what would the corporate decision-maker do?  Increase dividends?  Not likely.

I expect a wave of cap-ex to work it's way down the pipeline.  It won't be tomorrow, but it would be soon.

kralizec's picture

Something is pent-up...(thinking)...

q99x2's picture

Over at CNBC they have everyone out buying McMansions. Everything is back to normal.

AynRandFan's picture

If you were a CEO or CFO, would you buy your own stock, or spend on expansion?

I'm thinking, buy your own stock.

IamtheREALmario's picture

The days of insiders actually paying money for their own stock has gone the way of personal liability within the corporate setting. It is passe ... Today, CEOs are given their shares of stock gratis because the crony parasitic captialists in the banks and sitting on boards all make sure that the bulk of the money/benefit of corporatism is spread around within the club... and so they will lever up their balance sheets, pay themselves bonuses, dilute their shareholders. make acquisitions that have an infinite payback period and farm their production out to China before they invest in value creation within their own company.

IamtheREALmario's picture

To state the incredibly obvious, manufacturing is now a small and declining percentage of US GDP. What is a big user of Cap Ex spend? Yes, manufacturing ... unless you consider arming bankers, financial analysts, think-tankers/NGO-ers, lawyers, accountants, insurance companies, health care workers and government workers with iPhones and iPads made in China as Cap Ex spend.... or filling the NSA's and Googles massive super-snooper data centers with servers made in China as Cap Ex, then those predicting big Cap Ex spend in the US are going to be sorely disappointed.

Yes, the US desperately needs infrastructure upgrades and needs to produce more than bombs and drones ... but are we going to get it with the current genre of parasites and psychopaths in charge? I fear not, but would love to be proven wrong.

Manthong's picture

Public infrastructure will be the new CapEx. You will get your wish.

Sad to say.. but they won't get rid of the bombs and drones.