What Spending Slowdown?

BusinessWeek: What Spending Slowdown?

Forget those antiquated government statistics. U.S. corporate investment is booming—just take a look overseas.

When is a slowdown not a slowdown? On the face of it, the government's statistics tell a very convincing story about cautious companies and weak business investment. For example, so far in 2007 new orders for nondefense capital goods, such as computers, trucks, and machinery, are barely higher than they were a year ago, an omen, perhaps, of tough times ahead for corporate profits.

There's only one problem. Corporate America is still spending big time, just increasingly outside the U.S. A BusinessWeek analysis of financial reports from more than 1,000 large and midsize U.S.-based companies shows that global capital expenditures in the fourth quarter of 2006 were actually up 18.1% over the previous year, a number that includes nonresidential construction as well as info-tech equipment and machinery. The comparable growth for domestic business investment, which is all the government reports each quarter: only 8.9%, without adjusting for inflation.

…….

Welcome to the global economy, Mr. Statistician. Government measures were well-suited for the 1950s and 1960s, an era when U.S. companies mainly invested at home, and imports and exports were a relatively small portion of the economy. Even as corporations stepped out into the world, most of them still did the bulk of their capital spending at home. So government investment numbers remained an accurate gauge of corporate health.

Today, however, virtually every major company is trying to reduce costs and get closer to fast-growing markets by spreading manufacturing operations and research facilities around the world. As a result, a U.S.-centric view of capital spending, says Steven R. Appleton, CEO of Micron, is "almost meaningless."

…….

Today imports equal 66% of U.S. capital spending on non-motor-vehicle equipment and machinery. Even more mind-boggling, exports of capital goods from the country are just as big as the imports.

The bottom line: If a company is investing in the U.S., there's a good chance it's buying computers or some other piece of machinery made overseas. And if a piece of capital equipment, such as construction machinery, is made in a U.S. factory, there's a good chance it will end up being shipped abroad–perhaps even to help build a factory for a U.S.-based company that is expanding in another country.

If this all makes your head spin, you are not alone. The big divergence between domestic and global capital spending is a sign that the process of globalization has shifted into a new stage, and it's hard to know what's going to come next.