Did U.S. Companies Just Give the Economy A Vote of Confidence?

With both consumer and governmental spending expected to weaken this year, the United  States economy could use another source of stimulus, so it is fortunate that U.S. companies’ capital spending plans are holding up.

Consumer spending has been shown to be diminishing as many Americans have been forced to tighten their financial belts thanks to the harsh effect the increase in the payroll tax has already had on discretionary income. With ongoing debates over fiscal policy — first, the fiscal cliff, then the debt ceiling, and now March’s automated spending cuts — the federal government will have to make spending cuts as well, either forced by the end of the sequester or resulting from a congressional compromise

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But a Thomson Reuters analysis shows that this year many Standard & Poor’s 500 firms will be making capital expenditures that exceed analysts expectations. In fact, more companies will beat expectations than at any time in the past four years. The data is based on the reports of 221 companies, 66 percent of which showed capex guidances that were above what analysts had predicted, representing an increase of from last year’s 57 percent. On average, companies are expecting to spend $1.59 billion in 2013. While that is only a modest increase when compared to last year’s forecast of $1.57 billion, analysts had only been counting on expenditures of $1.48 billion.

Analysts had limited their expectations for capital expenditure growth back before congressional negotiations had resolved (at least, temporarily) the fiscal cliff’s combination of tax increases and spending cuts. “A number of companies said we’re planning our budget cycle on worst-possible conditions,” D.A. Davidson & Company chief market strategist Fred Dickson told Reuters, referring to the guiding sentiment at the end of last year…
These changes in capital expenditures are well in line with recent governmental data, which showed a rise in equipment and software spending in the last quarter of 2012.

Increased capital expenditure spending will not pull the U.S. economy out of the doldrums on its own — growth in gross domestic product is expected to slow to 1.9 percent from last year’s 2.2 percent due to the payroll tax hike and government spending cuts. But Thomson Reuters’s analysis does indicate that even though the economic conditions are tough, the environment may be changing. Companies, through their capital expenditure plans, have shown themselves to be willing to use the cash they have been collecting to spend more on new offices, plants, and machinery.

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“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 managing director Burt White told the publication.

Not all the funds will be spent on new projects, and the spending plans are only slightly above last year’s expenditures, but nevertheless, it is good news for the labor market as more spending usually means more hiring.

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