Pumped Up Kicks: Several Important Kickers for a Strong Capex Cycle

Key Points

  • U.S. business capital spending has already picked up; but an even sharper recovery could be in the cards for 2018.

  • Strong corporate profits and credit conditions are historically closely tied to the capital spending cycle.

  • Tax reform—if we get it—would be an additional kicker courtesy of the proposed 100% depreciation allowance.

It’s been referred to a period of secular stagnation, the post-debt supercycle, the new normal, among others. The U.S. recovery/expansion since the global financial crisis has left a lot to be desired with sub-par real gross domestic product (GDP) growth, disinflationary pressures, and anemic capital spending trends. Beneath the surface, there have been reasons for optimism that the stagnation was not a fait accompli; and now, those reasons for optimism have breached the surface. In particular, the pick-up in business capital spending (capex) is a relatively new bright spot for the U.S. economy; and in 2018 it will likely be a shining characteristic of the latter innings of an economic expansion.

Future capital spending plans surging

The official government-released measure for capex is “real nonresidential fixed investment,” which excludes residential housing from the mix (there is a separate “residential fixed investment” measure). As you can see in the blue line in the chart below, although it has turned up over the past year, it’s been largely range-bound since the initial surge out of the “great recession.” There are many leading and coincident indicators for capex, but one of the most closely-watched leading indicators—with a fairly tight historical correlation—is the Future Capital Spending Diffusion Index reported by the Federal Reserve Bank of Philadelphia.

Future capex plans surging

Source: FactSet. Fixed investment as of June 30, 2017. Future Capital Spending Diffusion Index (as of September 30, 2017) is part of the Federal Reserve Bank (FRB) of Philadelphia’s Manufacturing Business Outlook Survey and represents % of respondents indicating an increase minus those indicating a decrease in future capital expenditures over the next 6 months for reporting regional manufacturing firms.