By Amrith Ramkumar and Theo Francis
Spending on factories, equipment and other capital goods slowed in the first quarter among a broad cross-section of large, U.S.-listed firms, highlighting investor concerns that a key driver of economic growth is fading.
Capital spending rose 3% from a year earlier in the first quarter at 356 S&P 500 companies that had disclosed figures in quarterly regulatory filings through midday May 8, according to an analysis by The Wall Street Journal of data supplied by Calcbench, a provider in New York and Cambridge, Mass. That is down from a 20% rise in the year-ago period for the same companies, the analysis shows.
Executives at several companies said lingering trade tensions with China were making them and their customers cautious, raising the prospect that slower business spending could hamper economic growth later in 2019 and in 2020. U.S. nonresidential fixed investment -- which reflects business spending on software, research and development, equipment and structures -- rose at a 2.7% annual rate in the first quarter, pulling back from a 5.4% pace in the fourth quarter, the government said last month.
Among the 10 firms that spent the most last year, five lowered their spending in the first quarter, including Alphabet Inc., Apple Inc., AT&T Inc. and Verizon Communications Inc. Even so, gross capital spending for the group only fell slightly, reflecting continued investments and the impact of one-time items in the year-earlier period, which benefited in part from the timing of federal tax cuts. Together, the top 10 capital spenders invested $38.2 billion in the period, down from $40.7 billion a year earlier.
Broad trends in capital spending are closely watched by many analysts and investors, who view longer-term investments by large corporations as among the most robust sources of future economic growth. They contend this spending tends to spur further investment by partner firms and suppliers, and over time to lift worker productivity and overall economic output.
That is a process that many view as the key to extending the nearly 10-year old U.S. economic expansion, at a time when trade dynamics are unsettled, global growth is softening and the effect of 2017's federal tax cuts is fading.
"Any time there's trade tensions of this kind, it does put a certain amount of conservatism, I think, into all of our plans for capital spending," Caterpillar Inc. Chief Executive Jim Umpleby said on the company's April 24 earnings call in response to a question about spending plans for Caterpillar customers. The maker of heavy machinery lowered capital spending to $547 million in the first quarter from $757 million a year earlier.
Caterpillar's capital spending typically is focused on building new plants and buying equipment needed to manufacture tools used in mining and construction. The company has closed factories across the country in recent years in a bid to boost its continuing profitability even as it continues to invest in new projects, executives said at the company's investor day this month.
The first-quarter spending slowdown was most pronounced in the communication-services and consumer-discretionary sectors, where capital spending fell from a year earlier. Most large financial and tech companies reported strong increases for the quarter.
Communication-services company Alphabet, the biggest S&P 500 spender last year, lowered spending by more than a third in the first quarter to $4.6 billion. Alphabet's outlays include spending on data centers, servers and office buildings. The company's spending in the first quarter of 2018 included a more than $2 billion purchase of the Chelsea Market building in Manhattan.
"We continue to expect a sizable investment in both compute requirements to support long-term growth as well as in office facilities," said Chief Financial Officer Ruth Porat on an earnings call April 29.
The overall trend masked dramatic differences among companies, even within the same sector. While most technology companies increased capital spending -- the median increase was about 14% -- total spending for the sector declined by about 8% in the first quarter.
Apple, whose capital spending fell by $1.8 billion compared with first-quarter 2018, essentially accounted for that decline. The iPhone maker's spending is typically for manufacturing equipment, data centers, corporate facilities and infrastructure. An Apple spokeswoman didn't respond to a request for comment.
Spending growth also softened for some semiconductor companies that have been ensnared by the U.S.-China trade fight because they rely on Chinese demand and trade flows to drive revenue. Micron Technology Inc., one of the 20 biggest spenders last year, slowed its spending growth in the first quarter and lowered its estimate for the current fiscal year amid softer-than-expected demand and swelling inventories of memory chips.
The company typically spends heavily on factories and equipment needed to build the chips used in everything from smartphones to computers.
"We believe macroeconomic uncertainty is also contributing to hesitation in buying behavior at some customers," Micron CEO Sanjay Mehrotra said on the company's earnings call in late March. Mr. Mehrotra said a significant portion of the company's spending is also going toward building cleanrooms in which chips can be built, as well as toward assembly and test operations.
Other semiconductor companies including Microchip Technology Inc., which makes microcontrollers used in electronic and industrial components, have also either lowered capital-spending targets or projected drops for their current fiscal years. Microchip wasn't included in the Journal's analysis due to the timing of its most recent earnings report.
In response to a question about the company's profit expectations for the 2020 fiscal year, FedEx Corp. Chief Financial Officer Alan Graf also cited economic unknowns on the company's earnings call in March. The shipping company lowered capital spending to $1.1 billion in its latest quarter from $1.4 billion a year earlier. FedEx has said its capital priorities include updating its aircraft fleet and expanding FedEx Express hubs in Memphis, Tenn., and Indianapolis.
"If you could tell me, 'Are we going to get a trade deal done with China?' And, 'Is Brexit going to come out good?' I could give you a lot better answer... than I can sitting here at the moment," Mr. Graf said.
Write to Amrith Ramkumar at email@example.com and Theo Francis at firstname.lastname@example.org
(END) Dow Jones Newswires
May 19, 2019 05:44 ET (09:44 GMT)
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