Capital Expenditures Outlook - As of April 29, 2022 - Wilmington Trust
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Capital Expenditures Outlook As of April 29, 2022
Key Takeaways • We expect GDP growth to moderate to 2.4% in 2022 from its rapid pace in 2021 (5.7%). However, a downside scenario where oil prices remain elevated at $125 per barrel (WTI) on average in 2022 would bring our forecast down to 1.8%. • A tech-led business capital expenditure (capex) recovery is underway and separates the overall performance of business spending in this cycle compared with previous cycles. • Conditions for further strength in capex remain in place: company bank balances remain elevated, credit conditions remain supportive, and we think it is likely that the Federal Reserve (Fed) rate hike cycle will be less aggressive than currently projected in Fed’s March 2022 Summery of Economic Projections (see our slide deck on the Federal Reserve here, and recent Wilmington Wire here). • The bipartisan infrastructure bill should be supportive of capex for several years. • We expect solid capex to bolster GDP growth and productivity in the year ahead, though the pace of capex growth may slow after a rapid run-up in 2021. • Risks to the capex outlook include a larger than expected turn down in growth and business sentiment due to the Russia-Ukraine war, the potential for a more-aggressive-than-expected rate hike cycle, and uncertainty around structural shifts in consumer behavior in the post- pandemic economy ©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 2
Economic Growth Set to Decelerate in 2022
In the U.S., we expect growth to slow to 2.4% from the strong bounce seen in 2021 as fiscal stimulus recedes.
We expect growth to be supported by consumer spending, capital expenditures, and businesses rebuilding
inventories. A downside scenario where a sustained oil price shock pushes the price to $125 per barrel on
average through 2022 could reduce our GDP forecast to 1.8%.
Real gross domestic product (GDP, %)
7.5
Projection
5.7
5
2.4
2.5
0
-2.5
-5
2014 2015 2016 2017 2018 2019 2020 2021 2022
Data as of December 31, 2021, projection as of March 20, 2022. Sources: Bureau of Economic Analysis, WTIA.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 3Capex Rebound has been Swift
Business capex recovered to pre-COVID levels as of 2Q 2021, just six quarters after the start of the recession
(compared to an average of 11 quarters in the recessions since 1957). In the two most recent recessions
(below) capex did not recover the previous peak until 17 quarters later.
Business capex (cumulative % change in the quarters after the start of recessions)
10
More restrictive
Business capex surpassed
pre - pandemic levels six quarters after
the start of the recesson
5
0
- 5
- 10
- 15
- 20
0 1 2 3 4 5 6 7 8 9 10 More accommodative
11 12 13 14 15 16 17 18 19
Pandemic (recession start date 4Q 2019)
Financial Crisis (recession start date 4Q 2007)
Tech Bubble (recession start date 4Q 2000)
Data as of 1Q 2022. Sources: Macrobond, Bureau of Economic Analysis.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 4Business Capex: An Important Driver of GDP
Business capex accounts for a significant 13% of GDP. Along with consumption, it is a key driver of private
demand in the U.S. economy.
Shares of GDP by component (%, average 2000-2019)
Consumption 68%
Government spending 19%
Capex 13%
Investment
Residential investment 4%
Inventories 0.2%
Net exports -4%
Data as of 1Q 2022. Sources: Macrobond, Bureau of Economic Analysis, WTIA.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 5Firms’ Capex on Technology Soared in Wake of Pandemic
Business capex has been led by spending on software and information processing equipment (such as
computers) as firms turn to technology to adapt to the pandemic environment and increase efficiency.
Investment in new structures is well below pre-recession peaks and continues to decline.
Subcomponents of business capex (% change from 4Q 2019 to 2Q 2022)
% change since 4Q 2019
More restrictive
Information processing equipment
32%
Software
29%
Industrial equipment
18%
Research & development
14%
Entertainment, literary, & artistic originals
9%
Other equipment
9%
Mining exploration, shafts, & wells structures
- 12%
Manufacturing structures
- 14%
Commercial & health care structures
- 23%
Transportation equipment
- 29%
Other structures
- 31%
Power & communication structures
- 34%
- 40 - 30 - 20 - 10 0 10 20 30 40
More accommodative
Data as of 1Q 2022. Sources: Macrobond, Bureau of Economic Analysis.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 6Indicators of Capex on Equipment Remain Elevated
Nondefense capital goods ex-aircraft* shipments (an indicator for business equipment investment) and new
orders (a forward- looking indicator) remain solid. Now orders remained at lofty levels as well.
Shipments and new orders for core durable goods (non-defense capital goods ex-aircraft, % change since February 2020)
25
20.9%
20
20.0%
15
10
5
0
- 5
- 10
- 15
May September January May September January May
2020 2021 2022
New orders Shipments
Data as of March 31, 2022. Sources: Macrobond, Census Bureau.
Nondefense capital goods (ex-aircraft) include: small arms and ordnance; farm machinery and equipment; construction machinery; mining, oil, and gas field machinery; industrial machinery; vending, laundry, and
other machinery; photographic equipment; metalworking machinery; turbines and generators; other power transmission equipment; pumps and compressors; material handling equipment; all other machinery;
electronic computers; computer storage devices; other computer peripheral equipment; communications equipment; search and navigation equipment; electromedical, measuring, and control instruments;
electrical equipment; other electrical equipment, appliances, and components; heavy duty trucks; railroad rolling stock; ships and boats; office and institutional furniture; and medical equipment and supplies.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 7Low Inventory Levels Suggest Support for Further Capex
Strong demand for goods during the pandemic pushed business inventories relative to sales down to near-
record lows, and well below the long-term pre-pandemic average. Rebuilding of inventories and begun and
should be supportive of further capex, particularly in areas like industrial equipment.
Inventory-to-sales ratio and long-term average
4.8
4.7
4.6
4.5
4.4
4.3
4.2
4.1
4.0
3.9
3.8
3.7
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Ratio of nonfarm inventories to final sales of goods & structures
Ratio of nonfarm inventories to final sales of goods & structures (average from 1997 to 2019)
Data as of 1Q 2022. Sources: Macrobond, Bureau of Economic Analysis.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 8Elevated Liquidity On Hand
Firms are well situated to expand capex thanks to large balances amassed since the start of the pandemic
thanks to stimulus funds (Paycheck Protection Program), supportive corporate credit issuance conditions (for
larger firms that can access capital markets), and reduced spending on expenses such as travel.
Nonfinancial business balances* ($, billions)
5.5
More restrictive
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
More accommodative
1.0
0.5
0.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
*Nonfinancial balances are calculated as the sum of checking, currency, savings, time, and money market deposits
Data as of 4Q 2021. Sources: Federal Reserve, Macrobond.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 9Loan Standards Easing
The Fed’s bank loan officer survey show that on net, banks are easing standards for commercial and industrial
(C&I) loans, which has historically been supportive of increased capital expenditures.
Net percent of banks easing standards for C&I loans and business capex (year-over-year (y/y) % change)
More restrictive
%
40
> 0: Easing Standards
30
20
10
0
- 10
- 20
- 30
< 0: Tightening Standards
- 40
- 50
- 60
- 70
- 80
More accommodative
- 90
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Business capex (% change, year - over - year)
Net percent of banks easing standards for small firms
Net percent of banks easing standards for large & medium firms
Data as of April 2022. Sources: Macrobond, Bureau of Economic Analysis, Federal Reserve.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 10Loan Demand Improving Notably for Larger Firms
Banks report strong improvement in demand for commercial and industrial loans from large and medium-size
firms, and a more moderate pick up from small firms.
Net percent of firms reporting strengthening demand for C&I loans and business capex (% y/y)
%
50
40
> 0: Stronger demand
30
20
10
0
- 10
- 20
- 30
- 40
< 0:Weaker demand
- 50
- 60
- 70
- 80
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Business capex, equipment (% change, y/y)
Net percent of banks seeing stronger demand for commercial & industrial loans, small firms
Net percent of banks seeing stronger demand for commercial & industrial loans, large & medium firms
Data as of April 2022. Sources: Macrobond, Bureau of Economic Analysis, Federal Reserve.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 11Capex Plans Healthy, But Cooling for Manufacturing Firms
Surveys of manufacturing firms in several Federal Reserve districts and a national survey of large firms
(Business Roundtable) show plans for future capex at elevated levels.
Large business and regional manufacturer capex plans (index)
Index %
More restrictive
125 15
100
10
75
5
50
0
25
0
- 5
- 25
- 10
- 50
- 15
- 75
- 100 - 20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
More accommodative
Business capex
(% change, year - over - year) (right)
Regional manufacturers
(Average of NY, Philadelphia, Dallas, Kansas, Richmond Fed PMI capex plans, next 6 months) (left)
Large businesses
(Business Roundtable, CEO expected capital spending, next 6 months) (left)
Data as of April 30, 2022 for regional manufacturers, 1Q 2022 for large businesses. Sources: Macrobond, Business Roundtable, Federal Reserve Banks of New York, Philadelphia, Dallas, Richmond,
Kansas.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 12Small Businesses More Cautious on Capex
Small businesses have been harder hit by the pandemic and capex spending has been muted relative to
February 2020, though plans for future capex have recovered from the lows.
National Federation of Independent Business (NFIB) Survey: net percent of small businesses making or planning capital expenditures (%)
More restrictive
%
80
70
60
54%
50
40
30
27%
20
More accommodative
10
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
Actual capex, last six months, last six months Capex plans, next three to six months
Actual capex, last six months Capex plans, next three to six months
(average since 1986) (average since 1986)
Data as of March 31, 2022. Sources: Macrobond, National Federation of Independent Business.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 13Outlook for Monetary Policy in 2022
The rate hike cycle started in March 2022 with a 25bp increase. We anticipate the Fed will hike by 50 bps in
May but will move more slowly in the second half of the year as inflation cools and consumers slow their
spending. Balance sheet reduction could start as early as after the May meeting, with a potential three-month
ramp up to $95bn/month ($60bn in Treasuries, $35bn in MBS) according to the Fed’s March meeting minutes.
Federal Reserve balance sheet (in $ trillions) and federal funds rate (%)
10 6
PROJECTIONS
5
7.5 Balance
sheet
reduction 4
5 3
Rate
hikes
2
2.5
1
0 0
2005 2008 2011 2014 2017 2020 2023
Federal Reserve total assets ($ tn, left) Projections
Recession Federal funds rate - Top of range (%, right)
Data as of April 6, 2022. Sources: Macrobond, Federal Reserve.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 14Bipartisan Infrastructure Deal: $550 Billion of New Spending
The Senate passed a $1tn bipartisan bill in August 2021 with the House approving the deal and President Biden
signing the bill into law in November 2021. The bill would provide $550bn in new spending, mostly focused on
traditional infrastructure, which should be supportive of capex in coming years.
Bipartisan Infrastructure Bill key provisions ($, billions)
Roads, bridges, major projects $110
Power infrastructure $73
Passenger and freight rail $66
Broadband $65
Water infrastructure $55
Resiliency and western water storage $50
Public transit $39
Airports $25
Enivronmental remediation $21
Ports, waterways $17
Electric vehicles $15
Road safety $11
Reconnecting communities $1
Data as of November 9, 2021. Source: Committee for a Responsible Federal Budget.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 15Build Back Smaller?
The $2.4tn of proposed spending in the Build Back Better Act passed by the House in November ran into a
wall in the Senate with moderate Democrats like Joe Manchin hesitant to support the magnitude of spending
proposed. Our current GDP forecast for 2022 assumes no further legislation is passed on this front, so
smaller bills passing portions of the current proposal could create a boost to growth, dependent on details.
Key Components of Build Back Better Act as passed by the House
Amount Amount
Spending and tax breaks Offsets
($, bn) ($, bn)
Family benefits Increase corporate taxes
• Childcare • 15% minimum tax on large corporations
$585 -$830
• Paid medical leave • 15% global minimum tax & international tax reform
• Universal pre-K for three- and four-year-olds • 1% surcharge on corporate stock buybacks
Climate and infrastructure Increase individual taxes on high earners
• Clean energy and climate investment • Expand 3.8% net investment income tax
• Clean energy and electric tax credits $570 • 5% surtax in income > $10 million, 8% on income
• Clean fuel and vehicle tax credits -$640
>$25 million
• Infrastructure and related tax breaks • Extend and expand limits on deductibility of
Individual tax credits and cuts business losses
• Extend Child Tax Credit increase Health care
$215
• Extend expanded Earned Income Tax Credit • Repeal drug rebate rule
• Other individual tax changes • Reform Part D formula, cap drug price growth,
Health care -$325
allow targeted drug price negotiations
• Strengthen Medicaid services • Reduce Medicaid Disproportionate Share Hospital
• Extend expanded Affordable Care Act (ACA) tax (DSH) payments beyond 2025
$340
credits
• Medicaid hearing benefit Establish $80,000 SALT deduction cap
-$290
• Invest in health care workforce from 2026-2030, $10,000 cap in 2031
Other spending and tax cuts Other revenue
• Affordable housing $325 • Reduce tax gap by funding IRS
• Higher education and workforce spending • Superfund taxes on oil, methane fee
Reduce/Delay 2017 Tax Cut & Jobs Act base -$180
• Expand nicotine taxes
broadening • Reform tax treatment of retirement accounts
• Increase SALT deduction cap through 2025 $280 • Other
• Delay amortization of Research and Development
(R&D) expenses until 2026
Enact immigration reform $110
Data as of November 18, 2021. Source: Committee for a Responsible Federal Budget.
©2022 M&T Bank and its affiliates and subsidiaries. All rights reserved. Please see disclosures for important information. 16Disclosures
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