Read it here first: Slow CapEx Spending Worries Economists

Friday, April 13, 2007 | 07:35 AM

Slow_capex For the past 5 years, I've cringed each time I heard a bullish argument for rising Corporate Capital Expenditures (CapEx for short) stepping in for Consumer spending as it slows down. Its been little more than wishful thinking on the part of strategists, economists and traders.

We've addressed this issue many times in the past. Skittish CEOs/CFOs are simply too afraid to risk quarterly numbers to engage in aggressive CapEx spending. That's why they have chosen more often than not to buy back stock or issue dividends versus investing heavily in infrastructure.

Even when Accelerated Depreciation of Capital Spending (ADCS) created a huge tax break, most companies went for the high ROI purchases -- Business intelligence and productivity software that paid for itself in improved efficiency or reduced headcount over a relatively short period of time. Hence, the success of companies ranging from Business Objects (BOBJY) to Cognos (COGN) to Oracle (ORCL) over this period.

Except for the high ROI investments, or taxpayer subsidized purchases, CapEx has been punk. Now, we see that the rest of the dismal scientists have finally recognized that CapEx is "officially" softening. A new WSJ survey of economists finds that Economic Worries Move Beyond Housing: As Housing worries have become widely recognized (however belatedly that was) they are now being surpassed by concerns about weak business spending. This, even as economists again cut forecasts for home prices. (Query: If you are "forecasting" what happened last quarter, does that still count as forecasting?)

From this morn's WSJ:

"Weakness in business capital spending is edging out housing as the dark cloud on the U.S. economic horizon.

A new survey found that 20 of 54 economic forecasters responding to a query cited soft capital spending as the chief risk to their forecast that the U.S. economy will grow slowly but avoid recession this year.

Only 11 of the economists cited housing; the rest cited other threats, including inflation and oil prices.

Capital spending "scares me more than anything else because I can't explain the weakness," said Stephen Stanley of RBS Greenwich Capital."

Can't explain the weakness? Steph, pull up a chair, and ole Barringo will lay it out for you:

This economy has been stimulus driven -- ultra low rates, deficit spending, tax cuts, ADCS, (2) War spending, printing cash -- all contributed to the cyclical recovery since the 2001 recession. However, this has been anything but organic. Its been largely dependent upon government largesse. As that stimulus fades -- the pig is now mostly through the python -- so too does the economic growth.

When your growth is dependent upon cheap money and easy credit, guess what happens when credit tightens and money becomes less easy? 


Economy Enemy No.1: Soft Capital Spending (free WSJ)
Forecasters Say Extent Of Business Cuts Will Tell
Where Slowdown Ends
WSJ, April 13, 2007; Page A2

Friday, April 13, 2007 | 07:35 AM | Permalink | Comments (31) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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nice inflation report, yesterday's tape told the story. who knew?

Posted by: fat mary | Apr 13, 2007 8:39:44 AM

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