Will CapEx Come Back?

Tyler Durden's picture

Almost a year ago, we identified what the main stumbling block facing US (and global) corporations is in the New Normal ZIRP regime: namely corporate cash mismanagement, capital misallocation, and a serious lack of CapEx spending which leads to lack of revenue growth, secular declines in profits, further layoffs, and a broad contraction in corporate returns (absent the endless deus ex which is central-bank assisted multiple expansion). We also identified what in our view was the primary reason for this misallocation, which said simply, is the Fed's monetary policy which forces corporate executives to focus on short-term gratification of shareholders via prompt return of cash instead of reinvestment into the business - a critical requirement to assure top-line stability and growth. It got so bad that in 2012 numerous bond issues fared worse simply by stating the use of proceeds from refinance as CapEx and General Corporate Purposes instead of share buybacks or dividend recaps, in some ways converting the entire public capital market into one large private equity fund, where management works to keep their fleeting shareholders happy with dividend after dividend (instead of at least keeping the cash on the books). The results of our analysis have become evident in the subsequent quarters, when corporate earnings, profits and especially revenues not only pleateaued but have now in many cases reverted to contraction on a year over year basis despite seemingly near endless central bank largesse.

Today, we were happy to see that the issue of the disappearing CapEx - both in the US and globally - is the main topic of an analytical piece from UBS titled, simply enough, "Will capex come back?" And while we disagree with UBS, who has a more optimistic conclusion than ours, which we believe is a function of them incorrectly identifying the reason for plunging CapEx, we are happy that more and more strategists have narrowed down what is without doubt the main hurdle to promoting a true, sustainable corporate recovery, instead of one where the only EPS beats are driven from one-time restructuring charges (which are now recurring on a quarterly basis), non-cash items, and most of all, even more layoffs of workers: something which in turn continues to eat away at the heart of any given economy, forcing even more monetary intervention, and even more CapEx spending cuts.

Because sooner or later multiple expansion in a world in which 1% GDP growth is "acceptable" will end.

Here are UBS' complete thoughts on the matter:

Will capex come back?

At a broad global economic level the weakness of capex in recent months has been notable and troubling. It has been notable because the growth rate in capital goods orders in the US, Europe and Japan slipped into recession territory toward the end of last year (Chart 1 overleaf). And on our estimates global capital spending volume ground to a halt in the third quarter (Chart 2) even as global GDP eked out a modest gain (Chart 2). It has been troubling moreover given the role that capital spending plays in lifting the productivity fabric of the world economy and in fostering sustainable rates of economic growth. If developed economies are to ever weane themselves off their dependency on monetary and fiscal policy stimulus, private sector capital spending must push up a gear or two.

Tracing the causes of this recent recent weakness, however, is not that difficult. The slowdown in the world economy and the generic uncertainty about its future trajectory have depressed “animal spirits” in recent months. That has prompted companies to postpone or even cancel capital expenditure programmes. It is of note that heavy capital-intensive sectors - such as manufacturing – appear to have borne the brunt of the recent global slowdown.

Many non-manufacturing sectors, that are less capital-intensive, have fared much better (Chart 3). That incidentally helps to explain why  labour market activity in some economies, and most notably the US, has fared relatively well in recent months even as capital spending growth has faltered.

The weakness in capex can also be traced to policy uncertainty in the US, Europe and even China. In a recent survey of UBS company analysts over half (54%) believed that fiscal, monetary or euro membership uncertainty is delaying investment planning while only 9% believed that uncertainty is expediting planning (see ‘The Director’s Cut, Act 14, 8 January 2013). This link between policy uncertainty and capex can be seen empirically in the macro data in Chart 4 overleaf. It shows the level of G3 capital goods orders (from the US, Germany and Japan) against an index that captures policy uncertainty in the US and Europe. That index is inverted in the chart suggesting that greater global policy uncertainty has generally generated weaker capex levels over recent years (and vice versa). In relation to recent developments the analysis shows that uncertainty about economic policy reached a high point in the middle of last year. Capital spending subsequently weakened in response as many firms became more alarmed about the potential profitability of their capital spending plans.

Still, the outlook for capex from here ought to brighten a little. Forward looking indicators of global growth have perked up of late, including those that concern the capital-intensive manufacturing sector (Chart 5). Global trade growth in the meantime appears to be recovering partly thanks to a cyclical pick up in China. That as well ought to alleviate uncertainty about the global economic environment.

As Chart 4 additionally suggests policy uncertainty is not quite as extreme as it was in the middle of last year, partly thanks to last year’s initiatives from European policymakers and notwithstanding the intensity of recent US fiscal cliff negotiations. Those issues concerning the outlook for Europe and US fiscal policy clearly need to be become less politicized in the period ahead, however, if the outlook for capex is to brighten more. It perhaps goes without saying that credit restraint needs to become less pervasive in Europe as well for capex in that region to embark on any meaningful recovery.

A final consideration on the capex front concerns the relationship between corporate profitability and capital spending in advanced economies, and most notably the US. Many observers have been perplexed about the lacklustre pace of capital spending growth not just over recent months but over recent years against a backdrop where many companies have been flush with cash and as corporate profitability climbed to new highs. This anomaly is not that perplexing though if the declining capital intensity of many advanced economies is taken into consideration (Chart 7). Sectors that spend heavily on capital equipment, such as mining and manufacturing, have declined in importance for many years in those economies. That capital productivity has been climbing as capital goods prices have been falling (Chart 8) has also been of huge  importance in explaining why aggregate corporate cash surpluses have been so high even as aggregate capital spending has been fairly subdued.

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Flakmeister's picture

Why? Net-net the industrial world more than it can consume without incurring additional debt which it cannot service...

In other words non-energy CAPEX is dead....

ZerOhead's picture

Open it up a bit to include non-agricultural and non-military CAPEX and I think you've just about nailed it...

People just can't spend what they don't have or can't borrow. Governments on the other hand...

whstlblwr's picture

The Jews could bring non-energy CAPEX back from the dead. They are super-Jews.

Flakmeister's picture

Ever notice that friday night brings out its own special creatures?

Buddy you have serious issues...

whstlblwr's picture

LOL. Guess you haven't been around here much lately.

Flakmeister's picture

Yeah, I am usually repulsed by bigots of your ilk...

whstlblwr's picture

You can call me Big Otis even though I have a small dick. To tell you the truth I'm jealous of the Jew.

whstlblwr's picture

Not until you admit once and for all that even though I'm stupid as a rock, have no ambition, and hang out on blogs all day, Anglosaxons should rule the world.

Spread the word: Jews bad,
oil industry barons and defense contractor good.

idea_hamster's picture

With the way the developed economies have been warped by fiat, very little capital expenditure goes on, but alot of capital waste and misallocation happens.

How can you have CapEx if you don't have any kind of signal as to where to direct it?  Moar Facebooks?  Moar iJunk?  

Flakmeister's picture

As per Smith et al, capital is behaving exactly as expected, Why do you seem so surprised? Cash is piling up because no *sane* analysis shows that the requisite ROE can be achieved....

What CAPEX there has been of late is tied to exploitation of lower regulatory and labor costs... It is just like devaluing your currency, it is a race to the bottom..

francis_sawyer's picture

Joobux galore... No CAPEX... How'd that happen?

kaiserhoff's picture

Why would anyone think about capex when we have a newly minted Stalinist Dictator?

Until we get rid of Rufus von Ausland I see no point in discussing any long term plans.

disabledvet's picture

"only if we re-ignite housing...." which leads to "robot finance guy" to say "must have trillions more in bailouts. Must have trillions more in bailouts." I mean give me a break...the market has doubled, interest rates are at zero and "we're bodice ripping trillion dollar deficits like we're marketing to teenagers a new love potion." we have a problem with cap ex? Really? How about "hey phucker what did we get for that trillion?" Or is it a gazillion now?

knukles's picture

When'd he leave?


PS  "uncertainty about economic policy reached a high point in the middle of last year"... Really?  Reached a peak?  Where the fuck this guy been?  Gotten worse more like it.
Jesus people....


NaziPelousy and her folk running about yelling and screaming about raising Another $Trillion in Taxes and it's past us now?  All the Obamacare charges, taxes, fees and fuck all knows what kicking in and it's past us?
No it's not past us as in you and me because there ain't no you and me anymore, it's not past us because it's in front of us and we are all fucking screwed.
All of us.
Doomed, we're all fucking doomed I say.

The only thing we're past is the Good Olde Days.

kaiserhoff's picture

All this talk about the past in making me thirsty.

Wouldja couldja just pass the rum?

Opinionated Ass's picture

Why would any entity invest in a capital good? The risk of it being taxed, regulated or expropriated out of your hands has never been higher.


Capital expenditures will return with the return of private property rights.

sethstorm's picture

The problem is that you assume that nobody will get the idea to make it painful to not invest in a capital good - especially in a place like the US or EU.

That, and the military of the US is sufficiently capable of mooting jurisdictional arbitrages that it does not like.

DR's picture

The problem is that the US has outsource CAPEX to the third world. Are bank economists really that dumb not to understand this is the reason for low capital spending?

Flakmeister's picture

Oh goody, pass the popcorn..

From the latest issue of the Proceeding of the Royal Society:

Can a collapse of global civilization be avoided?

formadesika3's picture

We're all Easter Island now. Or maybe you were being wry.

youngman's picture

Not in the USA...it will be spend in other countries that have actual growth....Colombia just hit a new high for Foreign Investment dollars....its growing here

l1b3rty's picture


It seems to me the relationship among corporate profits and capital spent in western industrial companies creates an epicenter of sorts for commerce in the US, but this will certainly change as many investors look to spread risk, not necessarily invest in any particular country. The vector of risk spreading will continue to define our coming history.

Manipuflation's picture

CapEx?  As you know, I like to write about what I see and I just got done with four days of being an exhibitor at the Northern Green Expo in Minneapolis.  It is the largest green industry tradeshow in this region.  Attendance was up this year over the past few years in my estimation.  An interesting thing I have noticed over the years is the amount of women that are becoming involved in what was once primarily a male domininated industry and many of the females are young.(which is good in several ways)  There were also more young college aged students than I have ever seen before.  That represents a shift of some sort but I'm not quite sure how to interpret my own data just yet.

Why aren't these young people going to school to study finance and banking?  Why the sudden influx of youth into the green industry?  What do these young people see in the green industry and are the weed seeds of the last five years(actually nearly 100 years but...) of economic decay and theft in the finanacial services sector finally sprouting?  Are they saying "Fuck You Bernanke" and your stupid "green shoots", we will show you real green shoots?  Is it possible?  Could it be?  If this new crop of young people sticks with it and learns what a shovel is for, there might be a ray of hope.  Will the youth be persistant and put up with the shovel in their hands for some time before they can CapEx to a skid-steer or will they wash out?  You do not get instant financial gratification in the green industry.  Time will bear out the results.


Vint Slugs's picture

"Why the sudden influx of youth into the green industry?"

Maybe it’s because they have been brainwashed to think it’s a crime to build a house out of lumber – something about destroying the environment.

Maybe it’s because they have been so dumbed down in federally mandated K-12 schools that they are totally effing ignorant about the faulty economics of “green”.

Manipuflation's picture

Failure to communicate.  The "green industry" is landscaping, golf course maintenance, greenhouse operations, nursery operations, gardening operations, aboriculture, turfgrass management, property maintenance, plant science, disease management, agronomics, soil sciences, irrigation et al.  Are you getting the picture now? 

There are a lot of city people on this board who think they are going to buy some land and grow bountiful crops.  HAHAHAHAHA!  I have news for you:  You will all fail because of LACK OF EXPERIENCE IN GROWING ANYTHING EXCEPT YOUR OWN DEBT.

For you dumb fuck AAPL traders out there who thought I was talking about the Solyndra's of the world you are completely misguided by your perceptions.  Pull your fucking heads out of your asses.  Same goes for all of these assholes who finally decide to buy some guns but have never shot any of them in their lives.  Does that help you understand?

When I was in university there were a thousand or more kids going to school for finance.  I majored in horticulture because I GREW UP learning how to grow plants and enjoyed.  My horticulture class consisted of about 20 people.  DO you fucking understand yet? 

And when I STATE WHERE I WAS you should take the fucking time to look it before you go off.  No?  DO I have to do everything for you?  You, for you laziness and ignorance have finally earned the first down vote I have EVER given to ANYONE on ZH.


Yen Cross's picture

 CAP-Ex, will come back when bond yields explode.

Yen Cross's picture

Cost of $. It's cheaper to spend cash in other sectors. Build your base and lockin  rates. You can lease excess inventory, at higher rates. 

besnook's picture

or do bond yields explode when capex comes back? kind of a catch-22, isn't it?

Yen Cross's picture

When bond yields come back?  Listen I'm more macro. Have fun on the farm. You are years away from higher bond yields.

 I suggest you put your family/farm in order very soon, if you're worried about bond yields.

besnook's picture

money flows like water. it takes the path of least resistance. why would anyone risk capital with limited leverage for single digit returns when capital can be leveraged up to 50 times for double digit returns without losing sleep or breaking a sweat. besides, there is still huge overcapacity as a function of consumer debt to income ratios and .gov debt to income levels so the ratio has to be reduced by lower debt, higher income, both or a reset inducing war(because a prudent jubilee will never happen) that destroys capacity and debt leaving income at a low baseline ready to be inflated once again.

Yen Cross's picture

 You're out of touch with reality.  You have a tall hat, and no cattle. You need to ballance your P/L and give Z/H a call.

 My P/L for january is .89% trading. Under 1%.  ( I made a shitload of $ yesterday), but I got ass fucked last week!

  Don't bull shit me! Iv'e been bullshited by the best!

besnook's picture

i don't play for pennies anymore. i play the roll in a handful of equities i have followed for years that have very reliable characteristics except when they don't(lol). i have traded since 1997. blown to smithereens twice, the latest in 2008(held shorts until i was way stupid). this year(2012) i am up almost 100% by virtue of a super trade on OSIR(<5-12.5) and EBAY making a good move from 35-50 ready to make another move compliments of paypal and YHOO arising from the dead for a possible sale in the mid twenties this year. CLNE has been good for a steady dollar or two between 12-15. i like boone. he is a pisser. and my sentimental favorite has been CPST which i recently boatloaded at less than 90 cents for an easy 20-30% return in the next month or so. OSIR has some good news pending all year. the low float makes loading and unloading a little dicey so it is only for big pops. CPST has a large back order making it very stable for regular 10-30% scores. CLNE is as predictable as they come in the range it trades with a promising story. YHOO has finally become really attractive buyout bait this year for as much as a 50% trade from here. all of it is leveraged 3 times with no position more than 50% even when i am sure(lol).

this is the zimbabwe market. don't fight the fed. this market may correct but it will only go down in a total collapse or some black swan like the israelis framing iran in an attack on the capitol building. the only way to keep ahead of the print rate is to play the darlings of the pension funds who regularly pump money into them which sets off the htf algos for a regular roll or play the ones the pension funds avoid so news sets off the htfs for an exaggerated move.

currency trading is a real pain in the ass as is penny daytrading except pre 2006 or so.

Yen Cross's picture

Honda/swing arms prolink ©< Moto Cross>  Bell Ray lubes  (Japan kicks ass) GT-40 Nissan


IamtheREALmario's picture

Proof that only the dimwitted actual invest in productive assets. It is so much easier to be a financial genius and live off the productive work of others.

... and this is EXACTLY why America is failing.

Why concern oneself with productive physical assets when money and leverage are free.

Yen Cross's picture

 Do Not Mess with me /

Yen Cross's picture

besnook is a little " Tony Stark" girl!    That little girl makes me laugh. That pussy lives of his family.

 I am the Family! BITCHEZ

IamtheREALmario's picture

And there you have it. Our BANKER and politician lead economy is designed to print money and bid up prices, diluting value INSTEAD of being designed to invest money in productive assets. People who invest in productive assets are perceived by the moneychangers to be dim-witted because they do not gain the benefits of infinite leverage and insider dealing.

We in manufacturing are overburdened with government intervention, banker intervention and morons with piles of from cash who do not understand the concept of payback period because it conflicts with their idea of "business" being all about covering interest and then flipping it to the next guy with a pile of free, highly leveraged cash.

morning_glory's picture

ZIRP -> Lower Capex -> Lower Productivity -> Higher Employment -> Rising GDP -> Lower Relative Production -> Too much money chasing too few goods -> Demand Pull Inflation -> Gold Bitchezzzz!


Just thinkin' out loud.