Corporate America's 'ABC' policy - Anything But Capex

Wed Aug 6, 2014 1:52am EDT
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By Jamie McGeever

LONDON (Reuters) - The U.S. economy continues to recover from the depths of the Great Recession, although its speed, trajectory and cruising altitude remain the subject of fierce debate.

What's indisputable, however, is that one of the economy's engines has persistently failed to ignite, despite record fuel levels in the tank.

Corporate America has never been more flush with cash. But business investment or capital expenditure - "capex" - has remained depressed, puzzling economists and strategists who have long predicted its resurgence and attendant impact on growth.

Instead, companies have chosen to dip into their collective $1.8 trillion pile of cash to re-hire workers, fund merger and acquisitions activity or buy back their own shares. Boosting growth and returns through long-term investment in their business hasn't registered nearly as highly.

This suggests underlying demand for goods and services is weak - certainly weaker than it should be, given that the economy is five years into a recovery - and not strong enough to sustain a potential growth rate of around 2.5-3 percent.

The problem then becomes circular: weak demand holds back capex, which drags on growth, which depresses demand.

"Waiting for business investment to accelerate has been a painful and thankless exercise," wrote Morgan Stanley in a recent 14-page report on capex. "A close examination of this underinvestment paints a grim picture of productivity rates and the economy's trend growth potential."

Since the 2008-09 economic and financial meltdown, U.S. capex has fallen short of the trend seen over 1990-2007 by more than 15 percent. That's an annual $400 billion gap today, never mind the shortfall accumulated over the previous five years.   Continued...

A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011.  REUTERS/Yuriko Nakao