Capital Spending May Stay Sluggish Despite Jan. Spike

Investor's Business Daily

Businesses appear willing to invest a bit more this year, but the hoped-for flood of hoarded corporate cash still seems unlikely, amid lingering fiscal uncertainty and caution over the economy.

A modest spending rise would come despite the New Year's deal to avert most of the tax hikes in the fiscal cliff, though the year is off to a strong start.

Orders for core capital goods in January jumped 6.3% from December, even as overall durable goods orders fell 5.2% on aerospace and defense weakness, said the Commerce Department.

U.S. equities rallied strongly in the stock market Wednesday partly on that new report.

But the jump in capital goods demand may not last. Steep automatic "sequestration" budget cuts are due to take effect Friday. The political stalemate in Italy is a reminder that Europe's debt crisis isn't resolved yet either.

U.S. lawmakers' tax deal did indeed settle some questions, but the ongoing fiscal debate still leaves the door open to more tax changes, said Ken Esch, a partner with PricewaterhouseCoopers' private company services.

"There's maybe a little more momentum," he said. "But I don't see that translating to spending at this point.

A PwC survey of privately held U.S. businesses at the end of Q4 found 33% planned major capital investments in the next 12 months vs. 32% in Q3. But it was down from 40% a year earlier.

More than tax policy, the biggest obstacle to more capital spending is weak demand and job growth in the U.S., Esch said.

Businesses with greater international exposure tend to have more aggressive spending plans, while U.S.-focused ones are keeping theirs steady, he added.

Publicly traded corporations don't seem much more eager to ramp up spending either.

A Thomson Reuters analysis of S&P 500 companies' capital expenditure forecasts this year determined that the average guidance was $1.59 billion, up from 2012's average of $1.57 billion.

Chip giant Intel (INTC) plans to boost its investments to $13 billion this year from $11 billion.

AT&T (T) projects $22 billion in capital expenditures in each of the next three years, up from $19.7 billion last year. But Apple (AAPL) plans to ease investment to $10 billion from $10.3 billion.

Other surveys point to a modest uptick in investment as businesses remain hesitant.

Confidence in the equipment finance industry rose for the third straight month in February, though wariness over the economy and fiscal policy persist, according to the Equipment Leasing and Finance Association's research affiliate.

Of the executives polled, 20% see demand for leases and loans for capital expenditures growing in the next four months vs. 12% in January.

But ELFA's members, who facilitate equipment acquisitions, are saying their customers are more interested in replacing and upgrading gear than expanding operations, said ELFA CEO William Sutton.

Uncertainties also abound overseas. Settling remaining fiscal issues at home, such as sequestration and the debt ceiling, should boost growth, but are weighing on ELFA members for now.

"They all are a little wary of the impending fiscal issues," he said.

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