I have been reading quite a few articles, as of late, regarding the resurgence of corporate fixed investment in 2014 that will provide a much needed boost to the economy. My friend David Rosenberg recently penned in his daily missive:
“The hallmark of this cycle is that it goes down as the weakest ever in term of growth in the real private sector capital stock. Volume capital spending growth has barely averaged a 1% annual rate in the past half-decade, as the business sector moved forcefully to reward their shareholders in the form of dividend hikes and initiations and stock buybacks while refraining from investing organically in their own businesses.
I sense that this is coming to an end, and I say that because years of neglect and decay have now resulted in productivity growth slowing to zero percent on a year-over-year basis which is a development that tends to happen late in the cycle, not in the middle of one. Given the time worn link between productivity ratios and profit margins companies are going to be incentivized to divert their casl1f lows and cash on the balance sheet towards productivity-enhancing investment strategies in the coming year. And now that Patty Murray and Paul Ryan managed to cobble together at least a two-year budget plan, with bipartisan support in both the House and the Senate, also removes an obstacle which was a complete lack of fiscal clarity for the better part of the past half-decade.
But the real impetus is going to come from merely preventing more obsolescence to occur in the nation’s productive capital stock. The average age of the private sector capital stock is fast approacl1ing 22 years! That is total plant and equipment. The last time the corporate sector allowed its capital stock to get this old and obsolete was back in 1958. The very next year the annual growth rate in volume capital spending swung from -6% to +13.5%.”
David is not the only one hoping for a rebound in corporate spending in the next year.  It has been a central focus in many of the outlooks and forecasts that I have read for the coming year. However, is that really the case? Economically speaking, it would be much better for David to be correct on all points. However, from an investment risk standpoint we should also consider the other side of the argument.
