by Fred Ashton, Economist, NEMA
Capital expenditures, commonly known as business investment, is a key measure to understanding the health of the economy and serves as a barometer of business confidence. While the outbreak of COVID-19 has upended industry, at least temporarily, manufacturers recognize the importance of continuing to invest in new facilities, equipment, and intellectual property in order to maintain a competitive edge and improve manufacturing processes.
The most recent GDP report from the Bureau of Economic Analysis, a branch of the Department of Commerce, showed that Q2 2020 real nonresidential investment contracted 27.0 percent at annualized rate from the prior quarter as government-mandated shutdowns and demand destruction related to the COVID-19 pandemic left almost no industry unscathed. A more detailed breakdown showed that investment in structures and equipment were hit the hardest, sinking 34.9 percent and 37.7 percent, respectively, during the quarter. Intellectual property products, a third component of nonresidential investment, slipped 7.2 percent, the first quarterly decline since Q2 2013.
A sectoral breakdown of investment is published annually from the Census Bureau in their Annual Capital Expenditures Survey. The most recent data for 2018 showed that nominal investment by electrical equipment, appliances, and components manufacturers fell 1.1 percent and has seesawed between positive and negative growth since 2009. By comparison, the manufacturing sector overall has seen nearly uninterrupted growth in investment since 2004 except for a 27 percent decline in 2009 as a result of the financial crisis and a 0.6 percent decline in 2016.
A more detailed breakdown indicated investment in structures has increased in each of the last three years, with growth in 2018 measuring 16.4 percent. Meanwhile, electrical equipment, appliance, and component manufacturers’ investment in equipment saw swings of double-digit growth and contraction in equipment investment between 2014 and 2017 and a decline of 5.4 percent in 2018.
Investment in industrial automation equipment, sensors, and other equipment and structures enables manufacturers to improve their process by leveraging data, developing new products, and pivoting to fill demand in a rapidly changing economic environment. While the recent decline in business investment suggests corporate executives may be uncertain about the future, maintaining and even accelerating investment is a proven way to help ensure manufacturing vitality as the economy recovers. ei