The outlook for global and U.S. fixed capital formation is grim, according to Global Alpha Sector Strategy’s respective capex indicators (see chart).
In the U.S. (where we have the most detailed data breakdown) non-residential gross private investment comprises 40% of non-consumption GDP. Given the volatility of capex, this is a significant component of non-PCE GDP. Worrisomely, capex has been subtracting from GDP growth with the contribution swinging by over 100bps since the 2011 peak.
In contrast, non-residential fixed capital formation in the euro area (comprises 15% of GDP) is expanding at a healthy clip and positively contributing to GDP growth. The composition of capex is also different compared with the U.S. Outlays on machinery, equipment and weapons are the largest driver of overall capex (>40%) and sport the highest growth rate. Non-residential construction is on the recovery path and while IP is expanding, it has recently lost momentum.
Japan’s non-residential capex is contracting, and drifting lower as a percentage of GDP, dragged down by commercial structures and machinery & equipment spending, and to a lesser extent software. Outlays on transport equipment have been reaccelerating and are the sole capex sector showing signs of life.
From a global equity sector positioning perspective, this analysis is in sync with our recent breakdown of global industrials coverage in the three major regions: we continue to prefer Eurozone and Japanese industrials to their U.S. counterparts, within the context of an overall neutral global industrials weighting.