Nov 21, 2022 - Economy

Business booms in the face of recession jitters

Illustration of a pattern of dollar bills fading from left to right.

Illustration: Brendan Lynch/Axios

Executives may be talking about recession risks more on investor conference calls. But if you look at what they're actually doing, things look a little different.

Driving the news: The nation's biggest firms reported a record sum of capital expenditures (capex) — investments in buildings, new machinery or technology.

Why it matters: Restrained investment on the part of businesses is one way in which the Federal Reserve's aggressive interest rate hikes translate into slower economic activity.

  • So far, that impact is not as prominent as one might expect.

By the numbers: In the third quarter, S&P 500 companies spent $222 billion on capital investments, according to S&P Dow Jones Indices.

  • The firm calculated the figures from over 90% of firms that have reported corporate earnings so far. That means the final tally will almost certainly be higher.
  • The energy sector, which is seeing profits boom on the back of higher prices, is ramping up spending the fastest, the Wall Street Journal reports.
  • Last quarter, companies reported $197 billion in capex; this time last year, it was $176 billion.

Of note: The figures aren't inflation-adjusted. Part of that record figure boils down to pricier materials and other higher costs.

Yes, but: Corporate borrowing has slowed on the back of higher interest rates. Investment-grade bond issuance is at $75 billion so far this month, compared to this year's peak of $231 billion in March, according to Pitchbook LCD.

  • This suggests that while companies continue to invest at a brisk pace, they might not be borrowing as much to do so. Rather, they are relying on booming profits built up in recent years.
  • "We can debate whether or not we are going into a recession. But there is no recession in corporate earnings. Cash flow is still there," says Howard Silverblatt, an analyst at S&P Dow Jones Indices.

How it works: Higher rates of capital spending is a vote of confidence in the economy.

  • When companies invest in new equipment, or break ground on new factories and manufacturing plants, they are betting healthy consumption will ensure those investments pay off.

When the current dynamics flip — that is, profits begin to shrink, the economy shows clear signs of slowing and consumer demand falters — economists expect businesses will pull back on investment.

  • "For now, we continue to see resilient [capital expenditure] trends. But as we head into 2023, the combination of high inflation, lingering supply chain issues, a higher cost of capital and elevated uncertainty will increasingly constrain investment in low-growth sectors," Gregory Daco, chief economist at EY-Parthenon, wrote in a note last week.

The intrigue: In surveys, CEO confidence has deteriorated, pointing to a softer outlook for hiring and business investment. But that mood hasn't yet translated into substantially lower rates of employment. It also hasn't yet resulted in big capex pullbacks.

  • "There has been more resilience in the hard data than there has been in surveys," says Samuel Coffin, an economist at UBS.
  • Equipment investment grew at an 11% annual rate last quarter — roughly in line with the pace in the first three months of the year. Spending on intellectual property, too, grew at a solid 7% annual rate. (Spending on structures, which shrank at a 15% annual rate, is the outlier.)

What to watch: In the latest manufacturing PMI survey, one machinery firm sounded the alarm on equipment spending: "We have seen a general pullback in available capital budgets from our customers, and that is having a significant impact on our sales in the fourth quarter."

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