U.S. companies that have clung to cash hoards throughout the economic recovery may be more inclined to spend this year.
Over the last four quarters, CEO confidence as measured by a Conference Board index is at its best since mid-2011, according to Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. Confidence tends to lead spending on new equipment by about two or three quarters with a 65 percent correlation, “more evidence that 2014 will be a solid year for corporate investment,” Dutta wrote in a note today to clients.
During the recessions, companies cut back on investment and hiring to protect profits. The rebound since has been less than stellar as Investments in physical assets from machinery to buildings and technology, accounted for 12 percent of the economy in 2012, less than 13 percent in 2008 and 2007.
As prospects for the economy improve, so do the odds that CEOs will feel comfortable enough to part with company cash.
Some are already getting a head start. Ford Motor Co. plans to increase investment by $1 billion to $7.5 billion this year to add capacity as analysts project U.S. auto sales will surpass levels not seen in at least seven years. Microsoft Corp. intends to more than double investment in its fiscal 2014, which ends in June, to $6.5 billion from two years ago, mostly on data centers and networking equipment.
“Business confidence tends to be an important driver of capital spending and investment,” Dutta said in the note. “After all, decisions to invest are framed by current growth and expectations of future activity.”