US companies aren't likely to ramp up capital spending any time soon. Profits are at record levels as a percentage of GDP according to the Bureau of Economic Analysis, yet capex is only middling. Capacity isn't yet stretched, so a surge in investment is unlikely. Besides, bosses know that, right or wrong, mergers and stock buybacks impress investors more.
In the first quarter of 2014, non-residential fixed investment was 12.7 per cent of GDP, just above the average between 1999 and 2014 of 12.2 per cent by the BEA's reckoning. While spending on structures lagged the average, outlays on equipment were above the long-term trend and spending on intellectual property was 4.1 per cent of GDP, well above the average since 1999 of 3.6 per cent and rising. Since equipment and IP should stimulate more future growth than buildings, that mix is potentially good news for the economy. Overall, though, corporate investment is only around average.
That isn't surprising in the context of capacity utilisation running at 79.1 per cent in June, according to Federal Reserve data, below the long-term average since 1972 of 80.1 per cent. Yet pre-tax profits for US companies hit $2.1 trillion in 2013, a record 14.5 per cent of national income according to the BEA, and corporate cash flow reached $2.2 trillion by St. Louis Fed figures. That leaves companies with money burning holes in their pockets.
US boards elected to return $1.2 trillion to shareholders last year, according to the Carlyle Group. Around half that came in the form of stock buybacks, assuming a figure for Russell 3000 Index companies, quoted by Birinyi Associates, is roughly comparable. In addition, cash consideration of $443 billion featured in the $1 trillion of mergers and acquisitions that took place in the US in 2013, according to Thomson Reuters data. Investors typically reward stock buybacks, even though there's a tendency for companies to do them when prices are high rather than low and sometimes they obscure generous grants of shares to managers. Lately, markets have also been unusually kind to acquirers as well as M&A targets. Corporations with patient investors may feel able to invest more for the future. The bulk of them, focused on quarterly earnings, are likely to prioritise buying stock and other companies.
In the first quarter of 2014, non-residential fixed investment was 12.7 per cent of GDP, just above the average between 1999 and 2014 of 12.2 per cent by the BEA's reckoning. While spending on structures lagged the average, outlays on equipment were above the long-term trend and spending on intellectual property was 4.1 per cent of GDP, well above the average since 1999 of 3.6 per cent and rising. Since equipment and IP should stimulate more future growth than buildings, that mix is potentially good news for the economy. Overall, though, corporate investment is only around average.
That isn't surprising in the context of capacity utilisation running at 79.1 per cent in June, according to Federal Reserve data, below the long-term average since 1972 of 80.1 per cent. Yet pre-tax profits for US companies hit $2.1 trillion in 2013, a record 14.5 per cent of national income according to the BEA, and corporate cash flow reached $2.2 trillion by St. Louis Fed figures. That leaves companies with money burning holes in their pockets.
US boards elected to return $1.2 trillion to shareholders last year, according to the Carlyle Group. Around half that came in the form of stock buybacks, assuming a figure for Russell 3000 Index companies, quoted by Birinyi Associates, is roughly comparable. In addition, cash consideration of $443 billion featured in the $1 trillion of mergers and acquisitions that took place in the US in 2013, according to Thomson Reuters data. Investors typically reward stock buybacks, even though there's a tendency for companies to do them when prices are high rather than low and sometimes they obscure generous grants of shares to managers. Lately, markets have also been unusually kind to acquirers as well as M&A targets. Corporations with patient investors may feel able to invest more for the future. The bulk of them, focused on quarterly earnings, are likely to prioritise buying stock and other companies.