US companies plan to spend, a boost for the economy

Reuters: United States companies’ capital spending plans are holding up, and mostly exceeding Wall Street forecasts, in the face of policy concerns created by arguments in Washington over the fiscal cliff, the debt ceiling and now automatic spending cuts.

Their willingness to spend on new offices, plants and machinery, as well as a pickup in deal making, shows that they are starting to dig into the massive amounts of cash that has been collecting more dust than interest on their balance sheets.

That could prove a welcome counterpunch to a softer outlook for spending by consumers and government.

A Thomson Reuters analysis shows that for 2013, more Standard and Poor’s 500 firms are forecasting capital expenditures that exceeded analysts’ expectations than at any time in the past four years. Recent US Government data showed a rise in equipment and software spending in the final quarter of 2012.

If companies ratchet up spending, that could help unleash more hiring and extend the early-year rally in stocks, which tend to rise along with business spending.

“Once businesses start spending, that really means not only are they going to be buying goods, but they’re going to be hiring Americans, and those things are really what’s going to be the multiplier that helps to take this recovery and move it into greater expansion mode,” LPL Financial in Boston managing director and chief investment officer Burt White said.

Not all the money will be spent on new projects, of course. And the spending plans announced so far are only slightly above last year’s average. But they comfortably exceed the expectations of analysts, whose capex forecasts fell this year.

Part of the reason may have been the dire predictions about the ‘fiscal cliff’ late last year when analysts were putting together their capex forecasts. At least some chief executives, including DuPont’s, blamed uncertainty over US Government budget and tax policy for a reluctance to invest and hire.

“A number of companies said we’re planning our budget cycle on worst-possible conditions,” D.A. Davidson Lake Oswego, chief market strategist Fred Dickson said.

That companies have turned more optimistic than analysts heartens investors because it amounts to a vote of confidence in the US economy, which has been hobbled by high unemployment and household debt, and now faces curbs in government spending.

Another sign of confidence is the recent flurry of merger and acquisition activity. The US$ 173 billion in US deals announced so far in 2013 is more than double the volume seen last year at this time, according to Thomson Reuters Deals Intelligence.

After the financial crisis began in 2007, companies slashed expenses and jobs, and they remained diligent about keeping costs down even as the economy exited recession in mid-2009.

Federal Reserve data shows non-financial US companies had US$ 1.7 trillion of liquid assets, or cash, on their books as of the end of the third quarter of 2012.

The US economy grew at a 2.2% clip in 2012 and is expected to slow to 1.9% this year as higher payroll taxes and government spending cuts take a bigger bite. Yet even with the economic outlook cloudy, things seem to be changing.

Of the S&P 500 companies that have issued capex guidance so far in 2013, 66% have spending plans that exceed analysts’ expectations, the Thomson Reuters analysis showed. That’s up from 57% in 2012, 59% in 2011, 55% in 2010, and 40% in 2009.

Those that have issued guidance are expecting to spend US$ 1.59 billion on average in 2013. While that’s only a modest increase from the 2012 average of US$ 1.57 billion, it is above the analysts’ estimates. Those estimates went down, to US$ 1.48 billion in 2013 from US$ 1.51 billion on average in 2012.

The 2013 data is based on 221 companies that have reported, while the 2012 average was based on guidance from 279 firms.

Apple, the biggest US company, by market capitalisation, said it will spend US$ 10 billion on capital improvements this year, about US$ 2 billion more than last year. It ranked sixth in terms of capex projections for 2013.

Oil and gas producer Chevron tops the list with about US$ 33.4 billion of capex planned, followed by AT&T, ConocoPhillips, Wal-Mart and Intel, the Thomson Reuters data showed.

This spending could be crucial at a time when consumer and government spending are likely to decline. A rise in the payroll tax, higher gasoline prices and a delay in tax refunds, slowed retail sales in January a worrisome sign for the year. At the same time, a slate of across-the-board government spending cuts are set to take effect on 1 March, barring a deal between the White House and Congress.