Corporate spending in America to surpass US$2tr

PUBLISHED : Friday, 10 January, 2014, 1:28am
UPDATED : Friday, 10 January, 2014, 1:28am

Companies in the United States including Ford Motor and Microsoft are poised to boost business investment to a record in 2014, using a growing cash hoard to propel corporate spending past last year's US$2 trillion.

Chief executives are buying new machinery and investing in real estate as a US budget deal and growth in Europe signal a rebound in customer demand. That marked a reversal from four years ago, when companies began restraining spending from pre-recession levels and made do with the oldest equipment in 15 years, said BMO Capital Markets.

"The US is on the verge of an early capital expenditure recovery, one that is likely to have some considerable legs," said BMO chief investment strategist Brian Belski.

The US is on the verge of an early capital expenditure recovery

Chief executives who raised dividends and increased share repurchases in recent years now must lay the groundwork for future profit gains, said Mark Luschini, chief investment strategist at Janney Montgomery Scott. Investment would rise 6.7 per cent after a gain of about 2.6 per cent in 2013, said UBS Securities.

"They've got the cash and they have no choice," said Barclays analyst Scott Davis. "They need to grow and they don't want to lose market share."

Companies on the S&P 500 Index could draw on US$3.4 trillion in cash as rising share prices made repurchasing stock less attractive and low borrowing costs damped the urgency of paying down debt, Davis said. Private non-residential fixed investments stood at an annualised US$2.06 trillion at the end of September, US Bureau of Economic Analysis data showed.

Ford plans to increase investment by US$1 billion to US$7.5 billion this year to add capacity as analysts project US car sales will surpass levels not seen in at least seven years. Microsoft plans to more than double investment in its 2014 financial year to June to US$6.5 billion from two years ago, mostly on data centres and networking equipment. And Honeywell plans to invest US$1.2 billion, a one-third increase from 2013, in part to build chemical factories in Louisiana and Alabama.

Smithfield Foods, the pork producer bought in September by Hong Kong-based Shuanghui International, plans to increase capital expenditures to as much as US$350 million over the next 12 months, up from US$278 million in the financial year to April 28, 2013. The company had a "slate of nice payback projects", said chief financial officer Kenneth Sullivan last month.

Investments in physical assets such as machinery accounted for 12 per cent of the economy in 2012, lower than 13 per cent in 2008 and 2007 before the deepest recession in six decades caused companies to pare spending.

Companies have juiced profits to record levels on the back of cost cuts and lower investment to cope with disappointing global growth. A financial crisis in Europe and US budget squabbles last year sapped confidence. Now, it was time to grow, Luschini said.