aalmost wherever You look, it seems companies are scaling back their ambitions. Meta, the owner of Facebook, recently said that it will invest less in 2023 than it previously promised. Disney is cutting its capital expenditure plans for this year by a tenth, which means a less expensive investment in its theme parks. Calavo Growers, a huge producer of avocados and other fruits, plans to cut its capital expenditures “while we navigate near-term uncertainties.”
The anecdotes are part of an unfortunate broader trend. A global survey of purchasing managers tracks new orders for investment goods and is a proxy for capital spending. After picking up in 2021, it now indicates demand is in line with the 2018-2019 average. A US capital expenditures “tracker” produced by Goldman Sachs provides a picture of corporate expenditures, as well as hinting at future intentions. It is currently recording near zero growth, year on year (see Chart 1). A global tracker produced by JPMorgan Chase, another bank, also points to a sharp slowdown. The Economist Analysis of capital expenditure data from 33 Organization for Economic Co-operation and Development countries. In the last quarter of last year, capital expenditures were down 1% from the prior quarter.
Investing is the most volatile component in gross domestic product. When it goes up, the economy as a whole tends to do the same. additional capital expenditures and s&Dr It enhances productivity and raises income and living standards. There were hopes that the COVID-19 pandemic would mark the start of a new “super vertical cycle”. In response to the crisis, companies have ramped up spending on everything: digitization, supply chains, and more. Fixed investment in the rich world took just 18 months to recover to its pre-pandemic peak, a fraction of the time it took after the global financial crisis of 2007-2009. In 2021 and 2022 companies in s&s 500 Index of large US companies spent $2.5 trillion, which is equivalent to 5 percent of the country gross domestic productin capital expenditures and s&DrA real increase of about a fifth compared to the period 2018-2019.
So the latest numbers are worrisome. What people thought was the beginning of a structural trend may actually have been glut at the end of the lockdown. Companies also review future capital investment. Our analysis of the plans of about 700 large listed US and European companies indicates that spending in real terms will decline by 1% in 2023. The markets have internalized this change. In Europe, for example, shares of companies that usually do well when capital spending is high — such as semiconductor and chemical companies — rose in price relative to the broader stock exchange in 2021, but have since fallen.
Why is boom coming to an end? Three possible explanations are the most convincing. The first is that companies have less cash to burn even a few months ago. Businesses across the rich world have accumulated unusually high cash balances during the pandemic, in part because of grants and loans from governments. However, according to our calculations, since the end of 2021, stacks have fallen by about $1 trillion in real terms (see Chart 2).
The second relates to global economic conditions. Supply chain penetrations aren’t as bad as they were in 2021, which means there’s less need to invest in additional capacity or stockpiling. Figures from PitchBook, the data provider, show that in the fourth quarter of 2022, the number of venture capital deals in supply chain technology fell by about half compared to the previous year. Inflation has affected the real incomes of consumers – and companies are less likely to invest in new products and services if they fear that no one will buy them. Meanwhile, survey data suggests that higher interest rates are also driving cuts.
The third factor may be the most important. The capital expenditures boom was based in large part on the assumption that pandemic lifestyles would last forever, leading to economic reallocations that required an even greater number of new technologies. In many ways, however, the post-pandemic economy looks remarkably similar to the pre-pandemic economy. It turns out that there is a limit to people consuming Netflix and using Peloton. Spending on services has almost caught up with spending on goods.
There are exceptions – not least the oil companies – that are likely to boost capital expenditures this year, but these companies account for only a small share of overall spending. Companies that drove capex fees are falling. Semiconductor companies, in particular, have realized they’ve been overinvesting in capacity, and are now pulling back. In the fourth quarter of 2022, US real spending on information processing equipment fell 2% year-on-year. Forecasters believe that big tech companies are likely to cut capital expenditures by 7% in real terms in 2023.
In America, the Inflation Reduction Act would provide great incentives for green spending. the European Union Unveil their subsidies. The Russian war in Ukraine encourages Europeans to invest in alternative energy sources. And in an effort to rely less on China and Taiwan, many companies are looking to set up factories elsewhere. Over time, these various changes may increase the investment again. But there is no escaping the fact that the capex boom has died down. ■
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