There is still considerable skepticism about whether a meaningful capital spending will ever unfold, but we maintain that the cycle will revive.
Economic growth has been much lower than in past recoveries. The unusually high level of volatility associated with the perception that the economy is operating close to stall-speed has fostered a mindset of caution and mistrust, both amongst investors and the corporate sector. Chronic concern that the economy is on the edge of recession has caused business leaders to be tight with their capital. The corporate sector has been in a mode of profit margin preservation, but changes are afoot.
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The corporate financing gap is closing and M&A is picking up. These trends are both indicative of a budding revival of animal spirits. Importantly, there are no monetary roadblocks on the horizon that might short-circuit generous liquidity conditions. The Fed is positioned to stay easy for a prolonged period, regardless of the timing of tapering, owing to a lack of inflation pressures.
Thus, investment hurdle rates should stay easily surmountable. Investment in structures, electrical, industrial and railroad equipment are all sitting near multi-decade lows as a share of GDP. As the U.S. dollar weakens and revolutionary new growth opportunities such as fracking gain traction, it should spur at least a replacement cycle in many long neglected industrial sectors.
Bottom Line: The outlook for capital spending remains positive.
