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Capital Investment

August 13, 2021

With more economic growth to come, how do you decide how much capacity you'll need? Leading indicators can help. Catch our newest TrendsTalk episode with ITR Economist Lauren Saidel-Baker to learn more.

 

 

 

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Transcript by Rev


Hi, I'm Lauren Saidel-Baker. And welcome to this episode of ITR Economics Trends Talk. Let's talk today about capital investment. This has been one of the most common questions that I've been getting lately. And to be honest, that always makes me just a little bit nervous. I'm nervous specifically that the business world might be falling victim to one of the biggest pitfalls when it comes to capital investment. And that's the tendency to overinvest at the peak of the cycle. So I want to look instead of behind us at the cycle where we're coming from, but instead, let's look ahead and let's see what level of capital investment is merited. Because don't get me wrong. We are not yet at the peak of this economic cycle, we're in an accelerating growth trend in the US industrial economy. And the good news is that we have further accelerating growth to come into early 2022.

So there will be more opportunity. And for many businesses who are already facing capacity constraints and limitations, facing just a surge of orders that they can't keep up with, I absolutely understand the need to do something, anything to keep capitalizing on that growth, to take advantage, maybe gain some share away from competitors who can't keep up with that surging order level. So with more growth to come, how do you decide exactly how much more capacity you'll need? Well, the first step is to find your leading indicators, to find what sectors of the economy, what indicators you correlate with best. Because this upcoming slowing growth trend, it will be just that. We are not forecasting another industrial recession here in the US. So it's important to know, what does that slow down look like to you? Now in some sectors, some businesses, there could be a very mild level of contraction for others.

It might just be more of a plateau, a steadying at a certain level of activity. And for others still, there will still be growth. Our industrial economy will still grow albeit at a slowing pace throughout much of 2022 and into early 2023. So what can you do about it? Well, take stock of where you are today. Exactly how much more capacity could you use? And know that upcoming slowing trend, maybe you'll see a slight pullback. Maybe you'll just see a slowing growth trajectory, but either way, I imagine that might come as a breath of fresh air, a chance to catch up. That could be a great investing cycle, when you have just a little more breathing space, a little more bandwidth to be getting those capital investments in place to be getting your people trained up on those investments. Because if you're instituting things today, keep in mind that there is some amount of lead time.

We're not saying that what you buy today will be ready to go tomorrow. It might be in some cases a year or more. We track overall CapEx spending on the US at the domestic level. And that number is currently at a record high. Furthermore, we expect that 12 month moving total to expand through year end 2023, if not longer. Now that number is partially rising due to inflation. Things are costing more, prices are up, but even if we deflate the number of that indicator, volume is also increasing. So there is more demand. There is more activity, but watch out for the price cycle. Because prices are certainly elevating the level of activity and certainly many of the indicators that we're tracking. You don't necessarily want to invest at the top of the price cycle, if you can at all avoid it. In many cases, though, capital investment is a good thing and will pay dividends in the long run.

Specifically, say if you're having problems finding enough labor, the labor market is so tight right now and automation can be your friend. If you have the ability to automate away some jobs, that could serve you dividends. Because we do not expect this tight labor market to ease, at least in the next several years. Overall, I want you to have a plan. Capital investment isn't just something that happens, and certainly that gut feeling that you may be feeling today has the tendency to sometimes steer us wrong. So ask yourself, "What do I need today?" And knowing that there is some amount of lead time built into these investments, "If I can't have it today, what do I need once I will be able to have it either next year or further out into the future?" That's how we avoid linear budgeting, make a good plan and execute. For this episode of ITR Economics Trends Talk, I'm Lauren Saidel-Baker. Let's talk more soon.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.