Wilmington Trust Senior Economist Rhea Thomas and M&T Commercial Equipment Finance Group Manager of Direct Originations Scott Weissmann have analyzed the 2020 trajectory of capital expenditures and what to expect for the rest of 2021.
Last fall, M&T Bank’s John Wolfe, Commercial Equipment Finance, wrote about the importance of preserving capital during the economic uncertainties caused by the pandemic. Many businesses did just that and are now looking for an opportunity to deploy working capital by expanding facilities, upgrading equipment, or embarking on an acquisition. Many are wondering if the right time is now.
Capex has been on the rebound since 3Q 2020.
As of 1Q 2021, total business capital expenditures (capex) is now ~1% above pre-pandemic levels (4Q 2019), driven by investment in equipment and intellectual property products, which includes software.
Equipment capex has been led by strength in information-processing equipment, up 26% from pre-crisis levels (Figure 1), as the pandemic has increased the need for remote working and other virtual technology solutions. However, strength in software investment is unsurprising and will most likely continue to trend upward. Even before COVID, firms were investing in Fourth Industrial Revolution technologies to increase productivity and reduce production costs.
Data as of 1Q 2021. Sources: Macrobond, Bureau of Economic Analysis.
While the transportation sector is trending up since 3Q 2020, it is still not yet back to pre-pandemic levels. This is likely due to supply chain constraints and certain sub-sectors, like commercial coach and student transportation, weighing heavily on the positive industry drivers.
Industrial and other equipment has maintained a positive trend in 2021. Leading sectors include manufacturing, health care, construction, and food processing. We maintain optimism as the entirety of the equipment sphere is trending upward.
Given the robust economic outlook, business capex should continue to recover as we move into the second half of the year. (For a closer look at the anticipated capex trajectory, read Rhea’s latest Wilmington Wire blog post, “Business Investment: Capex Supports Recovery.”)
Data as of 1Q 2021 (large businesses), April 2021 (regional manufacturers). Sources: Macrobond, Business Roundtable, Federal Reserve Banks of New York, Philadelphia, Dallas, Richmond, Kansas, Bureau of Economic Analysis.
In our view, there are four key drivers of a more positive economic outlook: the virus, the vaccine, fiscal stimulus, and monetary policy stimulus. All of these are moving in the right direction, bringing the U.S. economy to an inflection point as we expect an improved health situation allowing the services sector to reopen, the labor market to heal, and excess consumer savings to be unleashed. Surveys of large firms and manufacturers point to plans to increase business investments in the coming months. Small businesses, which were harder hit by the pandemic, currently appear less optimistic compared to pre COVID, though capex plans improved in April as the economy started to reopen.
What does this mean for your business?
Now might be the time to invest in your business. The projection for increased consumer spending and a rebounding economy should signal the right time to upgrade business operations. Businesses are wise to consult with their trusted financial advisors to create a plan for the best use of capital this year, given the potential for rising inflation and interest rates as the economy strengthens.
In our next article, we assess important trends affecting commercial businesses, such as leasing, long-term financing, and corporate tax rates.
We invite you to review the content discussed in this article and reach out to your Relationship Manager, or contact Scott Weissmann directly at (607) 779-5912, or email@example.com. M&T Bank is proud to provide support to our commercial clients through every step of their business journey.
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