August 08, 2023
Last year, we discussed the deteriorating environment for capital expenditures (capex) and our expectations that capex would weaken further. Indeed, spending on business equipment has trended lower. However, the latest data for real spending on structures, adjusted for inflation, show a 9% rise on a year-over-year basis in the second quarter of 2023. We can categorize real spending on structures into five main categories: commercial and healthcare, manufacturing, power and communication, mining exploration, and other structures. Most of the gains are in manufacturing, which accounts for three-quarters of the increase in total spending. At the same time, industrial production has been slowing over the past year, so one would expect investment in manufacturing plants to be falling. How do we reconcile these two data points? The simple answer, we believe, is onshoring.
A separate data source allows us to pinpoint the driver of this strength. These data are nominal (not adjusted for inflation), so the magnitude of the increase can be partially explained by higher inflation. Nevertheless, the message is clear. The chart below shows nominal construction spending on structures for a subcomponent of manufacturing that covers the computer/electronic/electrical sector. As you can see from the chart, spending on factories in this sector has exploded to the upside in the past two years. Interest in this area seemed to pick up in late 2021, likely because of supply chain disruptions stemming from the COVID-19 pandemic. Spending gained further momentum after the CHIPS and Science Act, which provides subsidies, tax credits, and funding for semiconductor investments and research, was signed into law in August 2022. We don’t foresee this momentum ending anytime soon, and this area could continue to be a bright spot in our otherwise sobering economic outlook.
US non-residential spending on computer/electronic/electrical structures
Annual rate, January 1993-May 2023
Sources: Macquarie, Macrobond, US Bureau of Economic Analysis (BEA), and US Census Bureau.
Chart is for illustrative purposes only.
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