No More 10 Minute Breaks: CEOs Turn More Bullish About Business Investment

More chief executives say their firms intend to step up capital expenditures this year, hinting at a rebound for slumping business investment.

The economic outlook among top leaders is improving and firmer investment plans are the primary driver, according to Business Roundtable’s second-quarter CEO Economic Outlook Survey, released Wednesday. The group’s members are chief executives at the country’s largest firms.

The survey found that 37% of CEOs polled plan to increase capital spending in the next six months versus 18% who plan to cut back. The first quarter survey showed 34% planned increases and 23% said they’d reduce such spending.

Companies’ hiring plans and sales projections also improved modestly, but the investment plans were the primary driver for the CEO outlook index rising to 73.5 in the second quarter from 69.4 in the first. Figures above 50 indicate expansion. The latest reading remains below the average of 79.8 since 2004.

Despite the recent outlook improvement, CEOs downgraded their view of 2016 economic growth to 2.1% from 2.2%. The Commerce Department said the economy grew at a 0.8% annualized pace in the first quarter.

[wsj-responsive-sandbox id = "0" ]

“Increased plans for near-term sales, investment and hiring indicates modest economic improvement,” said Doug Oberhelman, CEO of Caterpillar Inc. and chairman of Business Roundtable. But weak growth expectations “points to an economy that continues to perform below its potential.”

He renewed his call for Washington lawmakers to act on “pro-growth policies.” He said those include ratifying the Trans-Pacific Partnership trade deal and updating the tax system.

Still, an upturn in business investment could be a positive for longer-term economic growth. Capital expenditures are an important ingredient in improving employee productivity, workers’ wages and corporate profits. A lack of investment risks trapping the economy in a low-growth mode.

A proxy for such investments, orders for nondefense capital goods excluding aircraft, have declined nearly 12% since touching a postrecession peak in September 2014, the Commerce Department said last month.

A slowdown in hiring, but stronger wage gains in recent months could be a precursor to better investment spending, said Fitch Ratings economist Brian Coulton.

“Employment growth could slow as labor becomes more scarce,” he said. “At the margin, businesses might find it more efficient to increase capital expenditures,” rather than hire workers at increasing wages.

The ample availability of workers at modest wages is one factor economists saw holding back business investment during this expansion, with firms choosing labor over capital. Another factor pushing down investment recently was the retrenching of the energy industry. That trend might be over with crude oil prices returning to the $50 range.

The Roundtable’s second-quarter survey of 139 CEOs was completed between May 4 and May 25.

U.S. Companies Dial Back Investment Despite Upbeat Economic Signs (May 26)

Study Projects TPP Will Provide Modest Gains for U.S. Economy (May 18)

from Real Time Economics http://ift.tt/239S7ra