Business spending outlook improves as profits grow

The outlook for U.S. business spending is improving as rising earnings, easier credit and pent-up demand prompt companies from Warren Buffett’s Berkshire Hathaway Inc. to Chrysler Group LLC and Lowe’s Cos. to expand.
Orders for nonmilitary capital goods excluding aircraft, considered a proxy for future business spending on equipment and software, climbed 7.2 percent in January from the prior month, the biggest gain since September 2004, revised data from the Commerce Department showed last week. They’re up 9.8 percent since November, the most for a three-month period since 1993.
Auto sales and the rebound in housing are driving gains in consumer spending, spurring companies, including Chrysler and Lowe’s, to update operations, hire staff or add stores. The biggest surge in profits since the 1990s, combined with near record-low interest rates, mean firms have the resources to soften the damage to the economy from federal budget cutbacks.
“The fundamentals that drive investment activity are improving rapidly,” said Diane Swonk, chief economist for Mesirow Financial Inc., in Chicago, which oversees about $67.5 billion in assets. “You really do have all this pent-up demand and catch-up activity.”
The ADP Research Institute said businesses added 198,000 employees in February after a revised 215,000 gain in the prior month that was more than initially estimated.
Business investment was one of the bright spots last quarter that helped the world’s largest economy overcome the biggest drop in federal military outlays since the final years of the Vietnam War era. Spending on equipment and software rose at an 11.3 percent annualized rate from October through December, the best performance in more than a year.
Swonk projects investment will pick up in the second half of 2013 as companies put excess cash to work, banks make it easier to borrow, the housing and automobile industries reach “tipping points” where plants need to be expanded, U.S. energy production grows and technological innovations fuel new investments, she said in a Feb. 13 report that made the case for an “investment boomlet.” Lowe’s, the second-largest U.S. home-improvement retailer, is boosting spending on store upgrades and hiring. It plans to open 10 stores in 2013, the Mooresville, N.C.-based company said on a Feb. 25 earnings call.
The “drivers of industry growth, mainly job gains and stable-to-growing housing, should support a strengthening growth trajectory for the industry,” CEO Robert Niblock said on a Feb. 25 earnings call with analysts. “The macroeconomic transition from recovery to sustainable expansion, together with our initiatives and improving operational collaboration, give us confidence in our business outlook for 2013.”
Profit from companies in the Standard & Poor’s 500 Index will exceed $120 a share by next year, double the level in 2008, according to Wall Street estimates. That’s the biggest increase since the 142 percent gain during the rally in technology stocks from 1993 to 1999.
Forty-eight percent of investors reported that capital expenditures are the best use of corporate cash – the highest reading since April 2011, according to a survey conducted last month by Bank of America Merrill Lynch.
“We see the continued elevated level of corporate profits as the clearest tailwind for investment growth this year,” David Mericle, an economist at Goldman Sachs Group Inc. in New York, wrote in a Feb. 15 research report.
Economists at Goldman incorporate profits, consumer spending, equity prices, banks’ willingness to lend, capacity use and the growth rate of the capital stock in a model used to project business investment. The most recent results point to about a 10 percent gain in business investment over the next year, enough to lift GDP by 1 percentage point, according to Mericle’s report. Mericle cautions the model “is subject to considerable uncertainty,” and changes in fiscal policy may also slow growth.
Companies that don’t have the cash are finding it cheaper to borrow. Average yields for corporate bonds rated in S&P’s BBB tier, the lowest investment grade, fell to a record low of 3.281 percent in January and stood at 3.356 percent as of March 4, according to data from Bank of America Merrill Lynch.
Extra cash and low borrowing costs may be enough to spur spending even as lawmakers in Washington debate how to trim the federal budget deficit.
A total of $1.2 trillion in automatic across-the-board budget cuts over the next nine years were triggered on March 1 when Democrats and Republicans failed to reach a compromise.
Government spending authority expires on March 27 and the federal government would shut down absent another budget deal among lawmakers and President Barack Obama. Washington policymakers also will have to negotiate raising the debt ceiling by May 19, when the suspension to that limit ends.
The fiscal-policy hurdles shouldn’t keep companies on the sidelines as the world’s largest economy recovers, Buffett, chairman and chief executive officer of Berkshire Hathaway, wrote in an annual letter to shareholders posted online March 1.
“There was a lot of hand-wringing last year among CEOs who cried ‘uncertainty’ when faced with capital-allocation decisions despite many of their businesses having enjoyed record levels of both earnings and cash,” Buffett said in the letter. “We will keep our foot to the floor and will almost certainly set still another record for capital expenditures in 2013. Opportunities abound in America.” •

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