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 What's indisputable, however, is that one of the economy's engines
has persistently failed to ignite, despite record fuel levels in the
tank.
Corporate America has never been more flush with cash. But business
investment or capital expenditure - "capex" - has remained
depressed, puzzling economists and strategists who have long
predicted its resurgence and attendant impact on growth.
Instead, companies have chosen to dip into their collective $1.8
trillion pile of cash to re-hire workers, fund merger and
acquisitions activity or buy back their own shares. Boosting growth
and returns through long-term investment in their business hasn't
registered nearly as highly.
This suggests underlying demand for goods and services is weak -
certainly weaker than it should be, given that the economy is five
years into a recovery - and not strong enough to sustain a potential
growth rate of around 2.5-3 percent.
The problem then becomes circular: weak demand holds back capex,
which drags on growth, which depresses demand.
"Waiting for business investment to accelerate has been a painful
and thankless exercise," wrote Morgan Stanley in a recent 14-page
report on capex. "A close examination of this underinvestment paints
a grim picture of productivity rates and the economy's trend growth
potential."
Since the 2008-09 economic and financial meltdown, U.S. capex has
fallen short of the trend seen over 1990-2007 by more than 15
percent. That's an annual $400 billion gap today, never mind the
shortfall accumulated over the previous five years.
On some levels, this reluctance from firms to invest is puzzling.
Productivity growth in the United States - the rate of growth in the
level of output per worker - is near its lowest in 30 years,
according to Bridgewater Associates. Spending on research,
development and technology, would surely improve this trend.
The need for capex spending is also pressing because firms are
reaching the point where they simply have to replace aging
equipment. According to Morgan Stanley, the average age of
industrial equipment is now almost 10.5 years, the highest since
1938.
M&A BOOM
But just replacing old equipment will not be enough to have a
notable impact on economic growth. That will require businesses to
spend over and above simple replacement rates, and so far that
hasn't happened.
If company executives can be convinced demand can hold up, the
conditions for splashing the capex cash are certainly there. Firms
have nearly $2 trillion cash, they've reduced their leverage and
indebtedness, and funding remains cheap and easy.
The positive impact of capex spending would be felt both in the
long- and short-term, according to Bridgewater.
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The effect of boosting productivity helps the economy's longer-term
growth potential, while corporate profits and margins are
"front-loaded" because outlays are amortized over time, yet related
sales are booked instantly.
But executives have instead preferred to hoard cash in record
amounts. And even when it has been spent it has been diverted to
pretty much anywhere but capex.
The global year-to-date dollar volume of M&A deals stands at $2.5
trillion, or an increase of 70 percent on the previous year, led by
North America ($1.2 trillion, up 83 percent) and Europe ($773
billion, up 85 percent), according to Deutsche Bank.
This year is almost certain to be the best year for M&A since the
crisis.
There has also been a drive to increase dividend payments to
shareholders and a resurgence of high-profile share buybacks.
Oil services company Halliburton has just increased its
buyback authorization to $6 billion, oil major Exxon Mobil spent $3
billion in the second quarter alone, and consumer goods giant
Johnson & Johnson announced a $5 billion repurchase program last
month.
Buybacks and dividends may not be giving the U.S. economy any
discernible boost, but they've done the stock market no harm at all,
as Wall Street roared to a record high late last month.
Despite the numerous false dawns since the Great Recession, analysts
still expect capex to pick up. If it does, then the broader economy
should benefit.
Morgan Stanley is confident it will, and predicts growth of around 5
percent. Bridgewater also expects a "gradual acceleration", which
could strengthen the economic recovery.
But the danger is that it fails to pick up enough. "A more
historically normal cyclical pickup, something in excess of 8
percent annually, simply looks unrealistic," Morgan Stanley said.
(Editing by Will Waterman)
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