America’s goods producing equipment is getting old.
“The last time the corporate sector allowed its capital stock to get this old and obsolete was back in 1958,” wrote Rosenberg today. “The very next year, the annual growth rate in volume capital spending swung from -6% to +13.5%”
“Given the rate of depreciation, we typically need 4% real capex growth just to prevent obsolescence from taking hold; in the past five years, we have averaged less than 1% annual growth,” he added. “With productivity growth now vanishing, with clear negative implications for profit margins if not reversed, the incentive to start plowing some of the cash hoard back into the real economy is running very high and is actually becoming increasingly evident in the recent business survey data. Revived capex growth is likely going to emerge as a key bullish cyclical theme for 2014.”
Morgan Stanley’s Vincent Reinhart recently identified this as one of the “four fundamentals” behind accelerating economic growth.
“[F]irms should feel a need to increase capital spending,” said Reinhart. “Supportive of this spur, businesses have been underinvesting for some time and have ample cash on hand, implying a reason and an ability to invest.”
“We all know that the corporate sector is flush with a tremendous level of cash on the balance sheet — almost $US2 trillion — and National Account profits are running at a decent 8% annual rate,” noted Rosenberg. “The debt markets are also wide open for financing needs. So ability is there to embark on a more normal capital spending cycle — the missing link in recent years.”