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Will Corporate Spending Float The Economy in 2014?
Submitted by Lance Roberts of STA Wealth Management,
I have been reading quite a few articles, as of late, regarding the resurgence of corporate fixed investment in 2014 that will provide a much needed boost to the economy. My friend David Rosenberg recently penned in his daily missive:
"The hallmark of this cycle is that it goes down as the weakest ever in term of growth in the real private sector capital stock. Volume capital spending growth has barely averaged a 1% annual rate in the past half-decade, as the business sector moved forcefully to reward their shareholders in the form of dividend hikes and initiations and stock buybacks while refraining from investing organically in their own businesses.
I sense that this is coming to an end, and I say that because years of neglect and decay have now resulted in productivity growth slowing to zero percent on a year-over-year basis which is a development that tends to happen late in the cycle, not in the middle of one. Given the time worn link between productivity ratios and profit margins companies are going to be incentivized to divert their casl1f lows and cash on the balance sheet towards productivity-enhancing investment strategies in the coming year. And now that Patty Murray and Paul Ryan managed to cobble together at least a two-year budget plan, with bipartisan support in both the House and the Senate, also removes an obstacle which was a complete lack of fiscal clarity for the better part of the past half-decade.
But the real impetus is going to come from merely preventing more obsolescence to occur in the nation's productive capital stock. The average age of the private sector capital stock is fast approacl1ing 22 years! That is total plant and equipment. The last time the corporate sector allowed its capital stock to get this old and obsolete was back in 1958. The very next year the annual growth rate in volume capital spending swung from -6% to +13.5%."
David is not the only one hoping for a rebound in corporate spending in the next year. It has been a central focus in many of the outlooks and forecasts that I have read for the coming year. However, is that really the case? Economically speaking, it would be much better for David to be correct on all points. However, from an investment risk standpoint we should also consider the other side of the argument.
In regards to the rewarding of shareholders, that is a trend that is unlikely to change anytime soon. This was clearly seen in 2013 as share buybacks surged in order to boost earnings per share in a stagnating revenue environment. I discussed this in some detail in my recent analysis of Q3-2013's earnings stating:
"One of the primary tools used by businesses to increase profitability has been the accelerated use of stock buybacks. The chart below shows the total number of outstanding shares as compared to the difference between operating earnings on a per/share basis before and after buy backs."
Corporate decision making is always based around profitability. This is particularly the case with publically traded companies whose executives are compensated through stock options and grants. The problem going forward is the topline revenue is likely to weaken for two primary reasons:
1) The majority of the benefits received from cost reductions has already been seen.
2) With wage growth stagnant personal consumption expenditures have been on the decline as cost of living has risen faster. The onset of higher healthcare costs from the ACA in 2014 and 2015 will likely impede that growth further.
The importance of the second point should not be dismissed. Corporate profits are ultimately driven by consumer demand. If consumer demand weakens, so too will profitability which will keep businesses on the defensive. The chart below shows the link between two measures of fixed investment and personal consumption expenditures.
The decline in PCE is troubling for a couple of reasons. First, PCE comprises almost 70% of the economy and that consumption is what drives corporate demand. Secondly, all previous annualized declines in PCE have led to declines in fixed investment. Given the current annualized decline in PCE, this would be the first time in history that fixed investment surged against such a backdrop.
David also makes an interesting assumption that we are currently in the middle of an economic growth cycle rather than a late-stage cycle. As I recently discussed in "30% Up Years" we are currently very long in the current economic recovery cycle:
"Ultimately, all economic recoveries will eventually contract. The chart below shows every post recession economic recovery from 1879 to present."
"The statistics are quite interesting:
- Number of economic recoveries = 29
- Average number of months per recovery = 39
- Current economic recovery = 53 months
- Number of economic recoveries that lasted longer than current = 6
- Percentage of economic recoveries lasting 53 months or longer = 24.14%
Think about this for a moment. We are currently experiencing the 7th longest economic recovery in history with most analysts and economists giving no consideration for a recession in the near future."
Given the data above, it is far more likely that we are closer to the next recession versus the middle of an economic cycle. The fact that productivity growth is approaching zero is likely due to the reality that businesses have already extracted the majority of the benefits from their ongoing cost cutting and productivity measures.
One of the most interesting points, however, was the assumption that the Ryan-Murray budget deal removed uncertainty from businesses and will now unleash a spending revival. This is not likely to be the case for a couple of reasons.
1) There is NO obligation that the next Congress, due to be elected in November of this year, will honor the Ryan-Murray budget deal. If Republicans hold the House of Representatives, and gain control of the Senate, then there is a risk of more disruption in the future particularly if they move towards austerity.
2) The Ryan-Murray deal does not remove "uncertainty" from business owners. While "government shutdowns" are certainly disruptive in the short term, the real cause of "uncertainty" for business owners has been government regulations, taxes and poor sales. The ACA is the current cause of uncertainty to business owners as the increasing cost of healthcare, and compliance with the law, combined with waning consumer demand is clouding the profitability picture. The National Federation of Independent Business regularly reports on the biggest concerns by small businesses and government regulations tops the list by a wide margin. The chart below shows the average of the top three concerns by small business owners. See the problem here?
Lastly, David is correct that the last time capital stock was this old (1958) there was a sharp rebound in the following year. There is also a massive difference between now and then. In 1958-59, the United States was in the midst of the post-WWII industrial expansion as the U.S. was the manufacturing center of the "known universe" as the rebuilding of Europe and Japan were underway. During this period of time savings rates were high, personal incomes and spending were rising, and economic growth rates were accelerating. That is not the case today as shown in the 6-panel chart below.
I want to be clear that I certainly hope that David is right. A resurgence of capital investment would certainly help stabilize the economy and potentially lift it to a level that would stimulate stronger employment and consumer demand. However, when it comes to managing investment risk, "hope" is not an investment strategy that works long term.
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No, corporations will just cry for more certainty as can only be delivered by purchase mandates from mommy government.
Noted. Cut .gov deficit spending 50% and these dudes go down fast.
correct, aside from potentially some small family farms, the earth is now dependent on government largesse. Humanity has experienced the rise of small realitively isolated fascist states before (i.e. Germany or the former Soviet Union). One has to wonder what the outcome of "one world" fascism will be...
German/italian fascism was a REACTION to (soviet) communism. I wonder why so many americans like to lump it all together.
American's are lumpy people...it makes sense.
Uh that's lumpen!
Eventually they all were fascists, I simply picked the endpoint at which things finally broke (no more social fabric etc.). It's irrelevant really as the outcome will be the same regardless.
Maybe someone should have told them.
When government is the problem, there's only one solution.
the Free State Project looks interesting. - www.freestateproject.org
https://pathofmusashi.wordpress.com/2014/01/07/winter-shoes/
Forward, Soviet
(Or whatever)
Mommy hasn't seen a corporation in years, or money for that matter.
Suspect Dave is in over his pay grade if he still thinks its worth investing capital in the USA.
NO! There's not enough money anywhere to keep QE going; that's why the Fed has to print it.
damn straight, especially when one considers current margins and real input costs for a company that actually manufactures something real.
there is a lot of capital investment required in first world infrastructure. But the corporates are so locked into the slave labour meme it will be very difficult to justify that except for certain industrial niches.
And we truly have to solve the financial conundrum one way or the other. Europe will probably opt for painful bail ins and that will cause social and political mayhem. But there is no way to avoid that as the Oligarchs will never relinquish their ill gotten without a fight. Its debt jubilee or its huge deflation; one or the other.
The Internet economy will just zoom n boom; thats the key to the future; especially if you include decentralised techniques for localised production via 3D type printers and integrated engineering solutions of eco systems.
Move into renewables, local agribusiness and local intergated engineering for infrastructure renewal. Plus the global net. Keeping in mind the ongoing conventional economy boom in DCs which will have to be reengineered to not copy cat the past Western paradigm. Now that is a huge challenge.
For that to occur it will require the political oligarchy empire to change focus; the true frontier where the wars will rage.
So, in the absence of a massive decrease in the human population (that would free up all kinds of capital and resources), go long sharecropping, physical assets/commodities of real value, and a dependable tribe...
your tribe concept is beyond my grasp. But nation states and oligarchs will rule for sure. The local will mesh into the global in Davos and other world forums.
The blue print is already there. The welfare state looks like its over for fifty years. We are deep into neofeudal counter reform.
If by tribe you mean networked power clques; yes. WS is a typical construct of that.
Some things never change, I think you "get it".
blueprints are great, but calories will still be required in order to actually do anything. I don't share your optimism in TPTB actually delivering on anything, regardless of where they hold their meetings.
Whatever floats your boat ...
My boat is the good ship Lollipop.
People need to stop pretending that the market still speaks freely. Data is managed, like prices are managed, like expectations are managed. Don't think this market has a chance of expressing itself freely... that's probably the biggest lesson of the last 5 years. Until something breaks, there's no reason to think otherwise. (In a nutshell, you will be gutted if you short on this kind of information. Stay to the sidelines or buy crap but don't let them make you another victim)
The people managing the system can't keep all the balls in the air forever. One of them, bond market, FX, or stocks, has to fail at one point.
moar debt ceiling, moar print
waiting for the announcement when the US goobermint starts buying GM's stuffed channel inventory, Walmart's bloated LCD TV inventory and Apple's iphone/ipad inventory to keep these markets humming
"Will corporate spending float the economy 2014?"...Is this an trick question?
Corporations are hoping they can just stay in business thru 2014!!
CRIMINALS, don't look for me to help!!
Just wait till they let you buy alcohol on EBT!
I'm getting me some of that dom perignon! and stocking up on bourbon. Yes! lol...
sin tax
"Thank you for welcoming me for my State of the Union address. By this time next year, I hope the need for all corporations will have vanished except for the ones I pick for their importance to our nation.
Our New Fascist Soviet model will be the envy of the world! There will be no need for cash, EBT cards will supplant cash and bank accounts, which the government will be needing, along with 401Ks and other private investments."
"Almost all Americans will work for USG INC. Our Chamber of Fascist Corporations will guide our Economic Policy. Evryone will benefit, eventually."
Corporate profit growth is already at a 4 year low. Do you really think they are going to drive it lower with capital spending.
Never worked that way at the organizations where I was employed.
They spent more during upswings and cut during downswings....
That group of 6 charts speaks volumes. 1975 - 85 period is the peak (USA Peak oil 1972 -75) and the economic drivers turn over. When one considers the downturn occurs in the best bond market ever with exponential credit expansion, what drives future growth? With World peak oil, 2006 - 10, likely in the rear-view mirror, cost of production, cost of distribution and R&D cost are all rising; therefore human wages will likely fall. Less disposable money and higher product costs leads to falling demand.
Nominal Equity and Asset prices will rise with freshly printed money.
Fuch Bernanke!!!!!
Corporations investing in America and its workers?
That was back in 1958 - not a snowball's chance in hell they will do that in 2014.
I wish economists would get out of their time machines and intellectual bubbles and see things for how goddamned awful they really are.
Corporate what? Who you fukkin kidding 2014 will be one the greatest jobless economies! Sears , Kmart , JC P , Abercrombie,HP ,, GM , Ford , boing will be closing stores every other day and laying off hundreds of thousands! Just saying!
Retail is dying except for Walmart, Cell Phone Outlets, Nail and Hair Salons and Dollar Stores.
"A resurgence of capital investment would certainly help stabilize the economy and potentially lift it to a level that would stimulate stronger employment and consumer demand."
No. This is not 1958. An increase in U.S. capital investment no longer means Carter Carburater will build a huge addition on their St Louis plant and hire 8,000 more production workers.
Welcome to today's environment. Over 90% of capital investment by U.S. corporations is now aimed at reducing labor costs either by lowering headcount at home (robotics purchased from Germany or Japan) or by moving the entire facility to Asia.
The old Keynesian models NO LONGER WORK in a global economy.
Outside of the tech and financial Industries corporate managers no longer have any training or background in growing the business through investment or expansion. For a good decade the endlessly repeated mantra has been "cost cutting". Managers who acheived "cost cutting", usually through the easiest way possible which is labor reduction, got the promotions and the bonuses.
Once cost cutting ceases to bring returns they will just turn their attention towards lobbying for government favors and various forms of financial manipulation. Hiring more people to create more production has been taboo for so long that it won't even be on the table.
NO; it won't. that was an awfully easy question. what's the next one?
No but, corporate bonuses may for those few criminals that benifit!