Excerpted from the Wall Street Journal
Large companies across the U.S. are gearing up to improve tactical radio systems, expand distribution centers, produce more crackers and refurbish hotel rooms—all signs of increased business investment that could give another boost to the strengthening U.S. economy.
The big spenders range from department-store chain Macy’s Inc. to Campbell Soup Co. and defense contractor Northrop Grumman Corp. All told, capital investment rose 15% in the fourth quarter to a five-year high of $166 billion, according to an analysis of capital-spending figures for 423 large companies from financial-data firm Calcbench—the third-fastest rise since early 2010.
Capital investment includes spending that improves or extends the life of physical assets like buildings, equipment and computers. Companies are under pressure to do more of it as aging business models and equipment run into limits on their growth and need to be updated. The improving economy is also starting to reward such investment.
Energy companies are slashing spending plans as oil prices fall, but other companies are helping pick up the slack. The U.S. Commerce Department on Friday said business investment across the broader economy posted solid gains in the fourth quarter.
The gains follow a long stretch of lackluster business investment. In fact, the fourth-quarter increase noted by Calcbench only slightly outpaced gains in revenue. Economists like Ted Wieseman at Morgan Stanley are heartened but want to see a pattern take hold.
“It’s been a dismal period for capital growth,” Mr. Wieseman said. “It’s encouraging to see some pickup, but for it to really turn around you’d need to see a consistent increase for several years.”
Campbell said it expects to increase capital spending by about 15% to $400 million during the year ending this summer. About 40% of that will pay for maintaining and replacing existing equipment. Much of the rest will go to a combination of cost-saving efforts and production expansion—adding capacity in its Pepperidge Farm cracker and Bolthouse Farms salad-dressing lines, for example. The company is also investing in productivity improvements, including its “soup common platform initiative” to simplify packaging and other aspects of making the company’s iconic soups, including cutting back from a dozen or more sizes of carrot and potato chunks to just three each.
Harris Corp., which specializes in communications technology for the military and police, said it has increased its research-and-development spending—excluding government-funded efforts—to 5.3% of revenue from 4% in the year that ended in June 2012. A significant part of that is going into the company’s high-return business making tactical and encrypted radios for the U.S. military and allied governments.
Some retailers are also planning big pushes. Macy’s said it would raise capital spending by $100 million this year, as it tries to develop a bargain-store format and works to tie its online and physical stores together more closely.
Budget retailer Dollar Tree Inc. said it expects to ramp up capital expenditures by as much as 45% over last year’s levels, to between $465 million and $475 million. Much of that will go toward opening a new distribution center in the Southeast, as well as adding new stores and remodeling old ones, including the addition of freezer or refrigerator capacity at 320 stores, the company said.
There are always some companies spending while others retrench. But the samplings indicate spending may pick up after a relatively strong showing last year. Among 358 large companies that have reported year-end results, capital expenditures rose by 9% during 2014, according to data from S&P Capital IQ. That outpaces 2013’s meager 2% increase and nearly matches 10% growth in 2012.
Total U.S. business investment isn’t quite that strong. In the fourth quarter, it rose at a 4.8% rate, slower than in the third quarter, the Commerce Department said Friday. But the full year’s investment in equipment, buildings and intellectual property rose faster than during 2013.