Capital spending for U.S. non-financial firms with revenues of more than $100 million declined significantly during the Great Recession, but in the six years since its end, companies have raised capital expenditures again only enough to replenish their fixed assets each year rather than increase outlays to levels that would equal the lost $300 billion, according to a 15-year study recently released by the Georgia Tech Financial Analysis Lab.
That comprised different behavior by boards and CEOs than during previous recoveries and has had much to do with retarding economic growth. And while companies have begun to loosen their purse strings a bit over the last few years, when it comes to expansion measures such as hiring, their reluctance on capex has continued to prove a drag on the economy.
“There is the same amount of hesitation now that we saw after the recession,” the study’s authors wrote. “There aren’t the animal spirits for growth that we typically see in expansion. It’s just not there.”
Many capex decisions are made on a company-by-company and industry-by-industry basis. But there’s no doubt board members collectively are still feeling a resistance to making big capital bets that stems from broad-based misgivings about the course of the U.S. and global economies, the state of mind of consumers and business customers, and the difficulties posed by factors such as the rising regulatory state.
For one thing, boards were traumatized by the Great Recession. “Boards play a pretty key role because they set the strategic direction and vision and goals for the entire management team,” said Deb Hays, a business-transactions partner for the Archer & Greiner law firm. “And folks are still running very lean and mean. Where they’re making capex is where it’s necessary to replace obsolete, worn-out equipment or facilities, where ROI is pretty strongly forecast, and where a case study has been made by the executive management team that this investment will generate a return that makes sense for the company.”
Also, CEOs and boards have been more ready to invest corporate assets “toward events that tend to receive quicker praise on Wall Street, such as new product launches or mergers and acquisitions, or dividends and stock repurchases,” said Bret Puls, partner with the Fox Rothschild law firm in Minneapolis.
Some companies, particularly large multinationals, have been reluctant to bring back money parked overseas to the U.S. for capital expenditures, Puls said. Also, the collapse in oil prices and in other commodities has reduced capital expenditures in those sectors.
Companies also remain reluctant to spend because of rife uncertainty in the global economy and the geopolitical climate, said Dennis Zeleny, a leading consultant on corporate strategy and human capital. The uncertainties include the strident U.S. presidential campaign, escalating conflict in the middle east, the wobbly course of former “BRIC” drivers including China and Brazil, and Obama administration policies that can be unpredictable and punitive toward business.
“In the meantime, wages remain relatively cheap, so it’s less expensive to hire workers than it is to invest in plant and equipment,” Zeleny said. It’s also easier for boards to justify stock buybacks, dividend increases and acquisitions as other ways to deploy corporate resources.
He and other experts don’t expect directors to feel confident about a significant expansion of capex until after the political campaigns in the U.S. are over this year and uncertainties are reduced.