The data are rather compelling. US expenditures on factories, trucks, machinery, computers and software have been running abnormally low for years. Whether measured against total GDP, S&P 500 sales or depreciation of fixed assets, total spending on such big ticket items is a small part of the economy. But it does have far-reaching ripple effects, resulting in even more spending, profits and jobs over the years. That's why this kind of spending is so important.
Has this demonstrable strike on the part of public companies — our usual big spenders — been the result of fear, conservatism or just uncertainty over the direction of the economy?
We think it's been an aftereffect of the financial crisis that started five years ago. Companies wanted to replenish their cash stockpiles to withstand any new gut-wrenching credit attacks or financing breakdowns. Since then, they have been working off the excess capacity of physical plant left over from the boom years earlier in this century — capacity which has become quite lean because these companies chose short-term preferences for liquidity over long-term commitments to new structures.
Capital spending matters
How has the spending strike affected the US economy? And how does that matter to investors? The implications are complex. Let's look at some of them:
The physical plant of the US private sector is aging. The average age of industrial, transportation and computer equipment and software is the oldest on record.