One of the big bullish stories that everyone’s waiting to see is the comeback in business investment, or capital expenditures (capex).
In his morning note today, Gluskin Sheff’s David Rosenberg lays out why he thinks people aren’t optimistic enough.
CAPEX SET FOR UPSIDE
Commercial real estate lending is picking up sharply alongside a boom in bank-wide commercial and industrial credit and an expansion in the nonfinancial corporate paper market. Capex plans in the Philly Fed special question were the highest since 2004. The Fed’s Flow of Funds data have shown that capital spending outlays have not exceeded internally generated cash flow in a single quarter this cycle. The financing gap is still hugely negative. The private sector capital stock, at 22 years of age, is the oldest is has been since 1958 and is strongly suggestive of an upgrade cycle (not to mention the fact that America’s spending on public infrastructure at a 20-year low!). NFIB spending intentions hit a cycle high. The Fed’s Beige Book contained numerous anecdotes of firmer capex in coming quarters. And now I see the confidence index published by the Equipment Leasing and Finance Foundation rose to a two-year high in March. Truck tonnage rose 2.8% in February and the ECRI leading smoothed economic index ticked up last week to a 2.3% annualized pace from 2.1%.
Earlier this month, Rosenberg also pointed to what he called the “strongest case for capex.” In case you missed it:
THE STRONGEST CASE FOR CAPEX
The answer lies in CAPU … in other words, capacity utilization rates. While hardly yet at a peak, at 77% for U.S. manufacturing they are at levels that in the past touched off a moderate capex growth cycle. As the chart below shows, there is a slight lag but a decent 65% historical correlation. History also shows that once 77% is breached in terms of CAPU rates in an up-cycle, capital spending in real terms in the ensuing years averages out to be 0% growth — enough to add an increment 60 basis points to headline GDP trends.
Here’s Rosenberg’s chart:
In their U.S. Capital Goods research note last week, Morgan Stanley’s Nigel Coe and Nicole DeBlase broke down where capex growth will come from based on their review of 225 companies.
“Our 4th iteration of this expanded analysis continues to see 7% CapEx growth in 2014, but flat/down CapEx in Mining, US Utility, Food Retail, Machinery, Telecom and Auto,” they wrote. “However, we highlight improved outlooks in Chemical and O&G (as we added more companies) with both of these end markets now looking up double digits and suggesting that the consensus negative opinion on energy investment is either premature or wrong.”
Check it out.
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