(FROM THE WALL STREET JOURNAL 12/1/15)
By Eric Morath
Business investment across the U.S. is fizzling out.
Companies appear reluctant to step up spending on the basic
building blocks of the economy, such as machines, computers and new
buildings. The broadest measure of U.S. business investment
advanced 2.2% from a year earlier in the third quarter, the
Commerce Department said last week, marking one of the worse
performances of the six-year-old economic expansion.
Other measures show an even gloomier picture. A gauge of capital
expenditures -- orders for nondefense capital goods excluding
aircraft -- declined 3.8% through the first 10 months of the year
compared with the same period in 2014, according to government
estimates.
Weak investment restrains economic output, one key reason the
economy has struggled to grow faster than 2% in recent years. The
weakness also saps the economy's future potential. Capital
expenditures are an important ingredient in improving employee
productivity, which has grown at an anemic pace in recent years but
is critical to workers' wages and corporate profits.
Many factors have conspired to limit growth in investments
during this economic expansion. Businesses hesitated to commit to
projects amid uneven consumer demand and concerns about the
regulatory environment. Thousands of firms have decided to bolster
share prices by spending money on stock buybacks and dividends,
rather than plow funds back into facilities and equipment, moves
that would boost worker productivity and eventually wages.
Some analysts say the buybacks are evidence companies see little
prospect of achieving good returns through capital investments.
Among companies in the S&P 500 index, share buybacks were up
10.4% in the third quarter compared with a year earlier and are up
more than 80% from a decade ago, according to S&P Dow Jones
Indices.
At the same time, an elevated unemployment rate for several
years after the recession meant a supply of relatively inexpensive
workers, possibly an incentive for businesses to spend on labor
rather than capital. Even as the unemployment rate falls, slack
remains in the labor market, shown by soft wage growth and a
historically low share of Americans, 62.4% in October,
participating in the workforce.
More recently, a stronger dollar and falling commodity prices
are sowing caution among a wide swath of companies. A string of big
mergers have also led to consolidation over investment-based
expansion.
Kraft Heinz Co. in early November said it would close seven
North American plants as part of its plan to cut $1.5 billion in
costs following the merger of H.J. Heinz Co. and Kraft Foods Group
Inc. At the same time, the company also said it would increase its
quarterly dividend by 4.5%.
The consolidation "will eliminate excess capacity and reduce
operational redundancies, making us more competitive," said Chief
Financial Officer Paulo Basilio on the November call with
investors. The company said it plans to invest in modernizing other
facilities.
The industries pulling back range from retailers and
manufacturers to energy companies and some services firms.
Macy's Inc. plans to close 35 to 40 stores early next year,
joining J.C. Penney Co. and Abercrombie & Fitch Co. among
retailers announcing cutbacks this year.
Diesel engine-maker Cummins Inc. attributed a recent sales slump
to more than a slowdown in overseas markets and a pullback in the
domestic-energy industry. The company said a decline in capital
spending by data-center operators in North America hurt its
power-generation business. As well, weaker demand slowed sales of
equipment to construction companies.
"We have already taken a number of actions to reduce costs
across the company," Chief Executive Tom Linebarger told investors
in late October. With "no clear signs of improvement in the
near-term, we are now implementing additional restructuring," which
includes 2,000 layoffs and a widespread review of manufacturing
capacity.
Storeroom Solutions Inc. Chief Executive Carlos Tellez said his
customers, ranging from medical-device manufacturers to large
universities, are growing more cautious. The Radnor, Pa., company
sells systems to organize and manage supplies.
Since the recession, "we saw people come back little by little,
but 2015 has gone in the other direction," he said. "There is a lot
of nervousness about where demand is going."
During the most recent recession, the decline in business
investment was far deeper than any experienced since the
Depression. But the ensuing rebound was more tepid than other
bounce backs. Capital expenditures, excluding aircraft and defense,
grew at a better than 10% annual rate in the first two years of the
expansion, but have eased significantly since.
Just over a year ago, business investment appeared poised for a
breakout. Economic growth had accelerated in the middle of 2014,
hiring was strong and the Federal Reserve had interest rates pinned
near zero.
Instead, the pace of investment slowed. A harsh winter weighed
on demand and shipments. The slump in oil prices caused investment
in what had been a fast-growing energy industry to collapse. A
strong U.S. dollar weighed on corporate profits and led many
companies to hunker down. And weak prices for other commodities --
from metals to grains -- stung sectors ranging from steel to
agriculture to mining.
Many economists expected investment to rebound in 2016 as those
factors fade. But fresh headwinds loom, such as an escalating war
in Syria, worries about terrorist attacks, rising interest rates in
the U.S. and a holding pattern ahead of the U.S. presidential
election.
Categories of investment stung by falling oil prices and the
stronger dollar were hammered especially hard over the past year.
Spending on mining and oil-field equipment fell 46% from a year
earlier in the third quarter. Outlays on railroad equipment, to
move the oil, fell even more sharply. Spending on farm tractors
declined 42%.
"Because of the market demand, we do not need to add capacity
now," said Martin Richenhagen, chief executive of farm-equipment
maker AGCO Corp., which has plants in Kansas, Minnesota and
Illinois.
A bumper crop combined with weak global demand caused prices for
food commodities to fall. That hurt farm incomes, curtailing demand
for the tractors and other machines the company produces. The
market for farm equipment is down about 30% from its 2013 peak, Mr.
Richenhagen said, "so you can imagine that you then don't invest in
capacity."
Gregory Daco, an economist at Oxford Economics, expects capital
investment to remain sluggish. "If businesses are not investing in
new capital, that contribution to potential growth is falling," Mr.
Daco said. "That is one of the factors that could push us into a
slow-growth environment for longer."
(END) Dow Jones Newswires
December 01, 2015 02:47 ET (07:47 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
Cummins (NYSE:CMI)
Historical Stock Chart
From Aug 2024 to Sep 2024
Cummins (NYSE:CMI)
Historical Stock Chart
From Sep 2023 to Sep 2024