Tag Archives: capex

Business Investment is Falling

Thesis: Now is the time for companies to invest in themselves given the upcoming rise in treasury yields.

Many companies have slowed investing considerably this winter. This is not surprising given what has been occurring on a macro level. The value of the dollar is rising and the overall world economy is struggling. These things coupled with hurting US energy sector has most likely contributed to these figures. According to recent reports, the demand for investment in non-defense capital good excluding aircrafts fell 1.4% from January. This is after we saw flat growth for the first two months of the 2014.

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According to experts, “Weak business spending—along with other factors like a downbeat export picture—prompted some economists to downgrade their assessments of how much the economy expanded in the current quarter. Morgan Stanlety said it now thinks gross domestic product grew at a 0.9% annual rate in January through March instead of its prior estimate of 1.2%. Macroeconomics Advisers lowered its estimate a tenth of a percentage point to 1.4%. http://blogs.wsj.com/economics/2015/03/25/weak-demand-strong-dollar-u-s-businesses-arent-investing-much/.  This is why I believe now is the time for companies to engage in serious capital expenditures. The US economy has been performing well relative to the rest of the world. Interest rates are due to start increasing as we have seen with this graph provided by FRED.

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The Fed has recently announced they will most likely being raising interest rates this year after many years of keeping them as low as possible to spur investment. This is why now is the time for companies to invest in themselves. In as soon as this year, the cost of borrowing could become a lot more expensive, leading to potentially lessened profits for companies. Federal Reserve vice chair Stanley Fisher said, “It will likely be appropriate for the Fed to raise rates this year, but said rate increases won’t followed a predictable or necessarily steady course once the Fed begins lift-off.” http://www.businessinsider.com/stanley-fischer-fed-speech-2015-3. This unpredictability is another reason why now is the time to invest. Capital expenditure is a key driver of revenue growth and can be the difference between sustained long term growth or stagnation. If companies are not able to invest in themselves and buy new plants, property and equipment (PP&E), then they can not grow and build revenue. While some companies may counter this by saying they can cut costs and improve the efficiency with how they operate, I say good luck. These kind of management strategies are good in the short term but are not sustainable. At some point, investment is necessary. While rates are expected to increase, this does not mean they will shoot up overnight. It is necessary for companies to begin building a plan and capex schedule for the next 10 years so they are able to prepare for this increase. Many companies have gotten comfortable with these low rates and may be dealt a major blow when this increase occurs. Hopefully companies are prepared and are able to adjust properly to whatever action the Fed takes. If not, it could mean trouble for GDP growth over the next few years.