Capital spending at US companies from Apple Inc to 3M Co is at the highest level since 2008 as upgrades to plants, property and equipment show some executives embracing the likelihood that the economy averts recession.
Expenditures rose 24 percent to US$43.3 billion in the third quarter for 140 non-financial companies in the Standard & Poor’s 500 (S&P) that had released such data as of Friday.
Starting with Alcoa Inc’s earnings report on Oct. 11, spending last quarter was the most since the end of last year. Year-to-date investments of US$149 billion are the highest since 2008, the analysis shows. Corporate investment in equipment and software climbed at a 17.4 percent annual pace in the third quarter, and earnings per share for S&P 500 companies have jumped 16 percent so far.
While economic growth is slow, it is enough to spur investment, said Frederic Dickson, who helps oversee US$28 billion as chief market strategist for D.A. Davidson & Co in Lake Oswego, Oregon.
“A lot of companies postponed upgrading facilities, hardware and technology given the fact they were fearing the economy would go back into recession,” Dickson said. “Now that they feel more comfortable the economy has skated around recession, they’re making necessary expenditures.”
US GDP rose 2.5 percent rate last quarter to US$13.35 trillion, topping for the first time the peak of US$13.33 trillion in the last three months of 2007.
Expectations are for further expansion, and for inflation, which would make it more costly to sit on cash, said Michael Gayed, chief investment strategist with Pension Partners LLC.
“It’s indicative of some kind of an expectation of a rebound of sorts going on in the next one to two years,” said Gayed, whose New York-based company oversees about US$140 million.
Apple more than doubled expenditures to US$1.6 billion in the third quarter from a year earlier, IBM Corp boosted spending 55 percent to US$1.3 billion, while Diamond Offshore Drilling Inc invested US$543 million, an almost sixfold increase.
Annual capital spending for S&P 500 companies had tumbled as a result of the recession that began in December 2007 and ended in June 2009. The US$149 billion in expenditures so far this year for the 140 companies screened surpasses the US$146 billion that the same companies spent last year and is just short of the US$169 billion peak for 2008.
Spending by companies is still unlikely to surpass the 2008 peak until consumer demand shows clear signs of recovery, said Ryan Wang, an economist with HSBC Holdings PLC in New York, who predicts GDP growth of 1.8 percent for this year and next.
“There still are a lot of headwinds for the consumer,” Wang said. “That’s going to keep growth moderate.”
Consumer purchases increased 0.6 percent in September, helping propel the world’s largest economy through the third quarter while policymakers moved to spur growth and hiring.
Without a pickup in incomes, which rose 0.1 percent, households may be unable to maintain spending. Consumer confidence also fell last week to its lowest level since the first quarter of 2009, the Bloomberg Consumer Comfort Index shows.
Companies in industries such as oil, gas and mining, including Diamond and Halliburton Co, maintained spending during the recession, Wang said.
Companies tied to home construction, such as Chicago-based wallboard producer USG Corp, slashed spending and have kept it at a minimum, he said.
Companies may be boosting capital expenditures now before a tax benefit from accelerated depreciation on investments ends in December unless extended by Congress, Wang said.
“Companies have stated that part of their capital expenditures are indeed intended to take advantage of that accelerated depreciation that’s available,” Wang said.
The recovery in capital expenditures is still a step in the right direction, he said.
“It just says that final demand is growing so that’s a positive sign and we’ll have to see if it keeps going,” Wang said.
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