A number of recent U.S. economic data releases, as well as management comments during earnings season, continue to support Fitch Ratings’ view that companies are proceeding cautiously when considering expanded investment in plant and equipment.
We see little evidence that a significant ramp up in capital expenditures is at hand, despite some positive signs regarding a modest pick up in manufacturing activity in the April Institute for Supply Management (ISM) survey.
The weaker preliminary read on U.S. GDP growth of 2.2% for the first quarter was driven in large part by a decline in nonresidential fixed investment, which contracted at a 2.1% annualized rate (compared with growth of 5.2% in the fourth quarter of 2011). March durable goods orders also showed weakness, down 1.1% in the month after excluding volatile orders for transportation equipment.
This tracks closely with our expectations for 2012 U.S. corporate capex, which appears to be lagging following a pull-forward of some corporate investment into late 2011.
Corporate capex grew last year, but that growth partly reflected an acceleration of some investment to take advantage of expiring bonus depreciation tax benefits. Heavy investment in the energy sector, which accounts for approximately 30% of total corporate capex, also helped drive 2011 growth. Energy companies remain outliers in early 2012, with aggressive capex plans still on track in light of high oil prices.
The hangover effects of accelerated 2011 spending, persistent concerns about the global demand outlook, and the absence of production capacity constraints are all holding back investment growth. Most management teams across a range of industries remain concerned about potential economic ripple effects from the European debt crisis and a slowdown in emerging market growth this year.
Many U.S. manufacturers have indicated that stronger relative demand conditions in the U.S. and Latin America are offsetting weakness in Europe as well as slowing growth in China. To the extent that companies are heavily exposed to those more challenging markets, the outlook for capex growth in the second half of the year is likely to remain cautious.
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