August 21, 2018 / 6:03 PM / 3 months ago

Breakingviews - Investment gives U.S. market, economy fresh legs

A trader looks up at a chart on his computer screen while working on the floor of the New York Stock Exchange shortly after the market opening in New York July 11, 2013. REUTERS/Lucas Jackson

NEW YORK (Reuters Breakingviews) - Business investment is giving fresh legs to the U.S. economy and its aging bull market. Companies are pouring a big chunk of what they saved from last year’s tax cuts into new plant, equipment and software. That provides welcome momentum – and some insurance against trade troubles.

Companies in the S&P 500 Index reported a 24 percent year-on-year increase in capital spending in the second quarter, the fastest since 2011, according to Bank of America Merrill Lynch. More comprehensive government numbers paint a similar picture. Business investment rose by 11.5 percent in the first quarter of this year from the preceding period and 7.3 percent in the second.

Investment is increasingly going into tangible goods, not just software and intellectual property that predominated in the past. Spending on structures increased by more than 13 percent in each of the first two quarters of this year while investment in equipment has been growing at a nearly 10 percent rate since the start of 2017. U.S. Steel has increased its capital-expenditure plans by a quarter, to $1.5 billion, to overhaul plants and boost flat-rolled steel capacity by 10 percent by 2020.

Capital spending, economists often suggest, is good because it raises companies’ productive potential and can provide a more sustainable boost than piling up goods for future sale, or consumer spending. It’s also a sign of confidence – a chief executive would hardly want to increase output just as demand was peaking.

The timing is helpful. The S&P 500’s bull run is set to become the longest on record on Wednesday, and investors pulled nearly $21 billion out of U.S. equity mutual funds in the first half, according to Morningstar. It also provides a bolster against political risks: President Donald Trump’s tariffs threaten a global trade war while his tax cuts are ramping up the deficit. He also threatens to politicize the Federal Reserve, suggesting to Reuters on Monday that it should offer him more “help.”

Capital spending doesn’t eliminate those risks, but it at least suggests corporate America thinks they can be managed. If the spending has a lasting effect, maybe they can.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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