Read it here first: Slow CapEx Spending Worries Economists

For the past 5 years, I’ve cringed each time I heard a bullish argument for rising Corporate Capital Expenditures (CapEx for short) stepping in for Consumer spending as it slows down. Its been little more than wishful thinking on the part of strategists, economists and traders.

We’ve addressed this issue many times in the past. Skittish CEOs/CFOs are simply too afraid to risk quarterly numbers to engage in aggressive CapEx spending. That’s why they have chosen more often than not to buy back stock or issue dividends versus investing heavily in infrastructure.

Even when Accelerated Depreciation of Capital Spending (ADCS) created a huge tax break, most companies went for the high ROI purchases — Business intelligence and productivity software that paid for itself in improved efficiency or reduced headcount over a relatively short period of time. Hence, the success of companies ranging from Business Objects (BOBJY) to Cognos (COGN) to Oracle (ORCL) over this period.

Except for the high ROI investments, or taxpayer subsidized purchases, CapEx has been punk. Now,
we see that the rest of the dismal scientists have finally recognized
that CapEx is "officially" softening. A new WSJ survey of economists finds that Economic Worries Move Beyond Housing:
As Housing worries have become widely recognized (however belatedly that was) they are now being surpassed by concerns about weak business spending. This, even as economists again cut forecasts for home prices. (Query: If you are "forecasting" what
happened last quarter, does that still count as forecasting?)

From this morn’s WSJ:

"Weakness in business capital spending is edging out housing as the dark cloud on the U.S. economic horizon.

A new survey found that 20 of 54 economic
forecasters responding to a query cited soft capital spending as the
chief risk to their forecast that the U.S. economy will grow slowly but
avoid recession this year.

Only 11 of the economists cited housing; the rest cited other threats, including inflation and oil prices.

Capital spending "scares me more than anything else
because I can’t explain the weakness," said Stephen Stanley of RBS
Greenwich Capital."

Can’t explain the weakness? Steph, pull up a chair, and ole Barringo will lay it out for you:

This economy has been stimulus driven — ultra low rates, deficit spending, tax cuts, ADCS, (2) War spending, printing cash — all contributed to the cyclical recovery since the 2001 recession. However, this has been anything but organic. Its been largely dependent upon government largesse. As that stimulus fades — the pig is now mostly through the python — so too does the economic growth.

When your growth is dependent upon cheap money and easy credit, guess what happens when credit tightens and money becomes less easy? 


Economy Enemy No.1: Soft Capital Spending (free WSJ)
Forecasters Say Extent Of Business Cuts Will Tell
Where Slowdown Ends
WSJ, April 13, 2007; Page A2

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Discussions found on the web:
  1. fat mary commented on Apr 13

    nice inflation report, yesterday’s tape told the story. who knew?

  2. Robert Coté commented on Apr 13

    “CapEx… stepping in for Consumer spending as it slows down.”

    Somebody just did a “find and replace” on: “Commercial Real Estate stepping in for Housing as it slows down.”

  3. nakliyat commented on Apr 13

    thank you veryy veryy nıce very nice….

  4. REW commented on Apr 13

    I’m not smart enough to argue with you, so please view this is a genuine question. What would you consider to be organic growth? If low rates, low taxes, and high spending are not real drivers of growth, what are?
    I can think of population growth as a driver of economic growth. I also can think of genuine productivity increases. Both of those seem to be occuring in this expansion.
    What else am I missing? What would make a normal expansion in your mind?


    BR: Population growth generates demand for basic services (Hosuing, education, transportation, etc.) — Technological Innovation that creates new products & demand (think iPods, Cell phones, PCs, Gaming, websites, etc.).

    Of course, increased personal income leads to more spending — travel, invstment, etc.

    Infrastructure upgrades do also — roads, bridges, energy transmission lines, etc. Corporate CapEx Investment doe also.

    These things can occur naturally (organically) or they can be stimulated via finacial and monetary policy.

  5. wally commented on Apr 13

    Well, it is all pretty much just right there in front of everybody’s eyes, isn’t it?
    It is really interesting to compare the world in 2007, with blogs, to the world in, say, 2000. News and analysis then came long after the fact.

  6. Michael M commented on Apr 13

    Old expansions: build a factory, buy equipment.

    Modern day expansions: find a supplier overseas who will build a factory and buy equipment.

    I suspect at least some of the weak capex is not because the investments are not being made, but because they are made overseas (China, South East Asia, Mexico etc) by suppliers instead. But I have not seen anyone in the press trying to quantify this effect relative to US capex.

  7. tjofpa commented on Apr 13

    And here’s some more good news this morning;

    “GE’s financial services growth helps lifts net income”

    Suggest u buy in with both fists if u like the headlines, cause today’s gains are gonna disappear faster than Dick Chaney at a BYU commencement address.

  8. Winston Munn commented on Apr 13

    The real driver of growth is debt, which is the same thing as money. The engine of bull markets is money supply; new money can only be created by new debt; when and if that spigot runs dry, the party will be over.

  9. tjofpa commented on Apr 13

    More good news in the headlines;

    The Commerce department reported that the trade deficit narrowed 0.7% to $58.4 billion in February, marking the third straight month of contraction.

    Imports narrowed 1.7% to $182.4 billion, the third straight month of declining imports. This is the first three-month drop in imports since the spring and summer of 2001.

    It’s a Positivety Day Redux!

  10. Polly Anna commented on Apr 13

    “The pig is mostly through the python.”

    Now THAT is a phrase I am going to steal and use a lot.

  11. Michael Schumacher commented on Apr 13


    Can’t the perma bulls , at this point , say that CAPEX is largely irrelevant since it has’nt materialized in the 6 years it’s forced down our throats as a reason to why the market will improve?? I think it’s become largeley a non-issue (the reality of it is not and I absolutley agree that it is a needed engine based on it’s spillover capacity to stimulate)however we’ve been waiting for it and it’s not happened up to this point. Why the emphasis on it now as it clearly disappears from the radar?


  12. greg0658 commented on Apr 13

    WinMunn – growth is debt? Are you a banker? I don’t get that paragraph. I understand as a small business I have to spend to make, but thats not growth until my equipment pays for itself, and GP+ goes into the black making stuff with it.

    Just as I got builtup in video to compete with major markets (I’m in minor to medium market) the standard changed to HD and a totally new set of equipment needs. I’m not sure when the wedding market will payback HD if ever. I’m certainly not going to go thru the beta vhs war as a business. Or debug software all over again.

    Here’s a stocktip for you all who make your living playing banker/investor – this near 50yo is going to stay standard def, and produce for web, where it dont matter.

  13. Francois commented on Apr 13

    Is it possible that the usual instruments of CapEx measures are not entirely valid anymore? When I look at the composition of the S&P over time, it is clear that the financial sector has taken more and more importance at the expense of the industrial sector. Historically, the industrial sector required (and still requires) high expenditures to generate supplemental output a.k.a. growth. The ration of expense/ expected extra output is rather high.

    This bring the question: How does one measure CapEx impact in the financial industry?

    How many dollars do you have to lay out to generate one unit of extra output? This last question begs another more fundamental one: how to define output in the financial sector.

    Not sure historical comparisons of CapEx and related measures are doable without a lot of caveats.


  14. me commented on Apr 13

    Michael M

    I keep saying what you said and no one listens.

  15. Michael Schumacher commented on Apr 13


    that most likely answers my question above, however more than one way to skin a cat.


  16. eightnine2718281828mu5 commented on Apr 13

    Its been largely dependent upon government largesse.

    Yep, our Republican/Randian free-marketeers just trotted down to the corner GreenspanMart and bought themselves a proper socialist expansion.

    Faith in the marketplace be damned; they had an electorate in desperate need of fertilizer.

  17. eightnine2718281828mu5 commented on Apr 13

    This is from your Luskin debate:

    The real issue, which Barry ignores entirely, is that even accepting his theoretical models as authoritative data sources, I showed a chart demonstrating that–in reality, as opposed to theory–growth of consumption over the past 15 years has utterly no visible correlation with MEW.

    Saying that MEW hasn’t been always and forever a predictor of consumption isn’t the same as saying that it currently has no bearing on consumption.

    If I heat my house with oil and change to heating with natural gas, I could post a chart showing that the temperature of my house fails to correlate completely with either oil or gas.

    Based on Mr. Luskin’s analysis, one might be tempted to forego paying the monthly gas bill, while Barry would counsel against such a move.

    I’m with Barry on this one.

  18. eightnine2718281828mu5 commented on Apr 13

    You could call it ‘income sector rotation’, shifting over time from salaries to equities to MEW.

  19. Richard Bernanke commented on Apr 13

    I find this commentary completely offbase. If you add US direct investment flows overseas to US “domestic” capex you will find no real slowdown in US investment. This is part of a broader global phenomena re the emergence of cheap and viable production platforms in China. The “shortfall” in US investment is offset by sharply higher direct investment outflows. That said, it still counts as a negative for US growth. My point is that your analysis totally misreads the behaviour of US executives.

  20. DavidB commented on Apr 13

    What I want to know is if they aren’t spending their cap on ex where is it going? Are they repairing their balance sheets instead? Or is the cash drying up altogether?

    I seem to recall a few faint voices in the near past stating that corps. are showing good improvement on their balance sheets

    I will start to get concerned when I see a deterioration in that area because that will be the most visible evidence of a drop in cash flowing into the corporate coffers.

    I haven’t seen that in the companies I follow. For them it is just the opposite. Hopefully that is also indicative of the market in general

    They may not be spending because it just is too pricey to do so at the moment. If that is the case we may not see growth but we could continue to see and improving corporate environment based on how smart corps. are with the cash flow they have on hand

  21. Dirk van Dijk commented on Apr 13

    Wouldnt you then logically have to subtract out foreign multinational investment in the U.S. from U.S. growth? At question is U.S. economic growth (punkish, and likely to stay that way for a while) not world economic growth (probably the best in recorded history). Yes, if U.S. based multinationals invest in China or India, they raise world growth, but it does not help U.S. growth.

  22. Cherry commented on Apr 13

    Socialist expansion? Please, don’t insult the Socialist by not understanding the difference between Socialism and Crony Capitalism.

    Crony Capitalism’s lust for repealing the business cycle is actually, the defining nature of the capitalist and his incapability with the nature of “free market intellectuals” dreams of a unfettered international free market. How quaint.

    Intellectualism is major problem with crony capitalism,a Marxist variety or Austrian economics. It isn’t based on realism or cultural identity. But a pure desire to turn people into commodities that have little human value. That is why the Bankers and Wall Street investers hoped the international gold standard in the 19th century would eventually overtime, destroy nations, kill cultures and make race worthless(thanks to Kurt Vonnegut on that distinction by your last post Barry lol). Thus we will be nothing more than commodities with no borders, living in this wonderfull free market paradise with no bigotry or persecution(the cultural marxists just drooled). Sadly the free enterprisers were to early and instead the gold standard caused hyper-nationalism and colonalism. Is Marxist intellectualism or free market intellectualism really different? Or is it some utoption materialistic drivel that features individualism or communalism as its utopian choice?

    Hence, I could argue ridding ourselves of the intellectual will solve many of the US’s disputes and arguements.

  23. Vdsat commented on Apr 13

    Cisco says its customers are at the early stages of a new upgrade cycle. What do you think about that?

  24. Eclectic commented on Apr 13

    He lay face down in the desert sand
    Clutching his six-gun in his hand
    Shot from behind, I thought he was dead
    But under his heart was an ounce of lead
    But a spark still burned so I used my knife
    And late that night I saved the life of Bar-Ringo

    (Bar-Ringo… Bar-Ringo . . .)

    I nursed him till the danger passed
    The days went by, he mended fast
    Then from dawn till setting sun
    He practiced with that deadly gun
    And hour on hour I watched in awe
    No human being could match the draw of Bar-Ringo

    (Bar-Ringo… Bar-Ringo… )

    One day we rode the mountain crest
    And I went east and he went west
    I took to law and wore a star
    While he spread terror near and far
    With lead and blood he gained such fame
    All throught the West they feared the name of Bar-Ringo

    (Bar-Ringo… Bar-Ringo… )

    I knew someday I’d face the test
    Which one of us would be the best
    And sure enough the word came down
    That he was holed up in the town
    I left the posse out in the street
    And I went in alone to meet Bar-Ringo

    (Bar-Ringo… Bar-Ringo… )

    They said my speed was next to none
    But my lightning draw had just begun
    When I heard a blast that stung my wrist
    The gun went flying from my fist
    And I was looking down the bore
    Of the deadly .44 of Bar-Ringo

    (Bar-Ringo… Bar-Ringo… )

    They say that was the only time
    That anyone had seen him smile
    He slowly lowered his gun and then
    He said to me “We’re even, friend”
    And so at last I understood
    That there was still a spark of good in Bar-Ringo

    (Bar-Ringo… Bar-Ringo… )

    I blocked the path of his retreat
    He turned and stepped into the street
    A dozen guns spit fire and lead
    A moment later, he lay dead
    The town began to shout and cheer
    Nowhere was there shed a tear for Bar-Ringo

    (Bar-Ringo… Bar-Ringo… )

    The story spread throughout the land
    That I had beaten Bar-Ringo’s hand
    And it was just the years, they say
    That made me put my guns away
    But on his grave they can’t explain
    The tarnished star above the name of Bar-Ringo

    (Bar-Ringo… Bar-Ringo… )
    (Bar-Ringo… Bar-Ringo… )

  25. Eclectic commented on Apr 13

    Just remember, Barringo. Don’t mess with me!… There’ll be hot lead that’ll find you from 8 different directions.

    I spit lead and talk about it later!

    Pow, pow, pow!!

  26. Winston Munn commented on Apr 13

    Greg –

    If there were no debts, there would be no money. I think it safe to say that money is required for growth; debt is required to produce money; thus, growth is dependent upon debt.

  27. Winston Munn commented on Apr 13

    “More good news in the headlines;

    The Commerce department reported that the trade deficit narrowed 0.7% to $58.4 billion in February, marking the third straight month of contraction.

    Imports narrowed 1.7% to $182.4 billion, the third straight month of declining imports. This is the first three-month drop in imports since the spring and summer of 2001.”

    It is unclear if this is good news; lowered imports without a compensating increase in exports (and tax dollars) means less U.S. consumption. It also means fewer recycled dollars to buy treasury bonds; without recycled dollars, the Fed has to monetize the difference in debt to bonds sold. When the Fed monetizes the debt, money supply increases, leading to inflation.

    It is interesting to note that M2 has also gone up during the last 3 months.

  28. tjofpa commented on Apr 14

    Eclectic does Lorne Greene.
    We had that 45 in our collection; though I swear I don’t know how it got there, Honest.

    Now that damn tune is gonna be in my head all freakin day! Thanks…

  29. tjofpa commented on Apr 14

    I am in complete agreement with u’re recycling thesis. The trade deficit falling in 5 of the last 7 months means less water for the washing machine. Though I’am not sure that it is also inflationary.

  30. Michael Donnelly commented on Apr 17

    In response to Michael M and Barry,

    Business Week’s Michael Mandel finally went over the edge. It’s official. “What Spending Slowdown?” page 30 in the April 23rd issue.

    I’ll have to amend my next post to add Mandel’s ravings. In short, where investment occurs actually does matter to most Americans. Jobs follow the investment, and that matters to folks.

    Now as far as investors are concerned he is right, who cares where the investment takes place, but then again who cares whether I hold American companies in my 401k.

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