Will Business Spending Pick up? - Ahead of Wall Street

By Zacks | Updated July 30, 2014 AAA

Wednesday, March 26, 2014

Stocks in Europe and Asia were broadly positive on growing hopes that authorities in those regions were getting ready to implement looser monetary and fiscal policies. The mood is expected to carry through to the U.S. markets as well, with this morning’s stronger-looking Durable Goods reading adding to the sentiment.

The ‘headline’ Durable Goods reading came in better than expected, though the report’s internals were a bit squishy. The component of the report that is generally considered a proxy for business capital spending (non-defense capital goods excluding aircraft) came in weaker than expected and the revisions to the prior month’s data were also negative.

Business capital spending has been the weakest link in the U.S. recovery, though investment in equipment was up more than +10% in 2013 Q4 after an essentially flat read in Q3 and low single-digit growth rates in the first half of the year. We saw a similar trend on the software side in the GDP report, now part of the intellectual property products account. The consensus expectation is that business spending will ramp up in 2014, particularly in the back half of the year, pushing GDP growth above the +3% level and helping accelerate the pace of hiring.

We saw some tell-tale signs of capital spending growth in recent months as companies have unveiled plans for full-year 2014. Companies like Eaton Corp (ETN), United Technologies (UTX), and Union Pacific (UNP) for among the notable operators that have announced big capex ramp-up plans for this year. But the trend is hardly universal and most companies remain content with either hanging on to their enormous cash holdings or spending it on share buybacks and dividends.

Today’s Wall Street Journal story about the letter written by Larry Fink of BlackRock (BLK) to the CEOs of S&P 500 companies urging them to not sacrifice long-term growth at the expense of short-term gains through buybacks favored by activist shareholders is very interesting. We will see if BlackRock’s call will have any lasting effect on corporate behavior, but the company’s status as the largest money manager in the world and its thus far friendly posture to activist shareholders gives its call more credibility.

Sheraz Mian
Director of Research

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