Conditions are ripening for a modest bounce in U.S. capex, so long as the fiscal thrust in 2013 is manageable.
I t is now well known that U.S. capital spending has already been a primary victim of the impending fiscal cliff. In particular, uncertainty surrounding future tax policy has immobilized the corporate sector’s capital spending plans and various business surveys have highlighted that outlays are at least temporarily on hold because of government policy.
For example, the Philadelphia Fed survey of capital investment intentions is approaching a level that typically corresponds with recessions. The survey is a good leading indicator for overall non-residential fixed investment and suggests that investment will weaken further in the next six months. However, the ‘good news’ is that this oscillator is already near its weakest level (excluding the 2008 experience at the height of the Great Recession). There is historical precedent for a sharp snap back in sentiment, should the fiscal cliff get resolved in a mild manner (our base case is for a drag of 1.5% of GDP).
Importantly, fundamentals suggest that absent a fiscal cliff, the outlook for capex spending should brighten somewhat in 2013 relative to this year. Consumers are past the worst in terms of deleveraging, the Fed has further committed to aggressive monetary policy for an extended period and the corporate sector’s balance sheets are still healthy.
Bottom Line: There is potential for a ‘catch up’ phase in investment spending beyond the fiscal cliff.
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