U.S. Q4 real GDP growth was boosted 0.3% by resurgent private nonresidential fixed investment for the first time since Q2 2008. Basically, capex spending came back, finally. Spending on equipment and software drove this change, jumping 13.3% year over year.
Critics of this capex spike argue that the jump was artificial; the result of the expiration of a ‘bonus depreciation’ program.
Yet Goldman Sachs digs into the issue, and finds this criticism unfounded by comparing the current data to a similar situation that happened back in Q4 2004.
Goldman: The 2003/04 Experience. In contrast to our findings for 2009Q4, our results show that the depreciation bonus was unsuccessful in boosting investment when the 2003/04 program expired. (This conclusion is in line with previous studies; see our January 22 2004 Daily Comment and the paper by Cohen and Cummins cited above.) For example, we find no evidence that expenditure on equipment and software grew more strongly than the model would have suggested in 2004Q4 (see column 3 in the first row of the table). (There is some evidence that capital expenditure rose faster throughout the period that the incentive was in place, but this effect is not statistically significant.)
Thus the capex rebound is real, criticism is unfounded, and the rebound is likely to continue through Q1 at the very least.
Recent Orders and Industrial Production data. First, factory orders for capital goods – a lead indicator for future equipment spending – continued to rise in December; nondefense capital goods excluding aircraft grew by 30.5% (mum, annualized). Second, industrial production of capital goods continued to grow strongly in January; for example, industrial production of computer and electronic products grew by 19% (mum, annualized) in January – even faster than during December. Taken together these developments are inconsistent with a pullback in capital expenditure in Q1.
We conclude that the expiration of the depreciation bonus fails to offer a convincing explanation for the strong increase in capital expenditure on equipment and software in Q4, providing little reason to expect substantial pullback in Q1. Instead, the surge in equipment expenditure may simply have been due to “replacement demand” for capital goods, as utilization rates are still too low to suggest outright expansion of capacity as a reasonable motivation. Following a long recession during which firms held on to their existing equipment, improved profits may have been used to replace worn-out capital goods. This mechanism could explain why capital expenditure on short-lived assets such as computers surged so dramatically during the last quarter of 2009.
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(Via Goldman Sachs, The Q4 Surge in Equipment Spending: The ExpiringDepreciation Bonus Not the Key Driver, 19 Feb 2010)