US manufacturers to temper investment pace after vibrant 2023
CAPITAL spending by United States manufacturers will probably cool in 2024 after a banner year of investment in plants as still-elevated borrowing costs and demand concerns temper a lingering desire to upgrade operations.
Purchasing and supply executives expect outlays to increase almost 12 per cent this year after rising by nearly 15 per cent in 2023, according to the Institute for Supply Management’s latest semiannual economic forecast. While factories are dialling back the pace of investment, S&P Global Market Intelligence sees spending in the sector still climbing US$54 billion after an estimated US$50.6 billion last year.
Investment by manufacturers in plants and other production facilities surged almost 63 per cent in 2023, the largest annual advance since 1951, according to the government’s latest report on gross domestic product. The increase has its roots in companies taking advantage of federal incentives and making up for deferred spending during the pandemic when supply chains were in disarray.
Producers are reshoring production, plus they are upgrading technology and pursuing productivity-enhancing technologies such as automation and artificial intelligence, said Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee.
Yet economists project overall US economic growth to slow this year – averaging 1.5 per cent compared with 2.5 per cent in 2023, according to the latest Bloomberg monthly survey.
Along with that cooldown, growth in capital outlays is unlikely to match last year’s pace. Burdened by softer orders against a backdrop of tepid overseas demand and a domestic-spending shift towards services, manufacturing has struggled for traction.
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A report from the Federal Reserve Bank of New York showed factory activity in the state at the start of 2024 dropped to the lowest level since May 2020, while the Institute for Supply Management’s broader measure of manufacturing across the US has been in contraction for more than a year.
“Companies are just very cautious going into 2024,” said Bloomberg Economics’ Eliza Winger. “Companies are really worried about tightening credit conditions even further going forward.”
A fourth-quarter survey of National Association of Manufacturers (NAM) members showed that capital expenditures are expected to grow 0.6 per cent during the next 12 months. Excluding the aftermath of the pandemic, that projection is the weakest since the second quarter of 2016.
“Because there is uncertainty there, I think that there is just some caution when it comes to overall spending and capex plans for the year,” said Chad Moutray, NAM’s chief economist.
Private investment, which includes business spending, inventories and residential outlays, is projected to grow about 1.7 per cent on average this year, based on the monthly Bloomberg survey. In 2023, non-residential fixed investment alone increased 4.4 per cent, helped by federal incentives.
At the same time, the long-term strategy of reshoring of production – particularly on goods deemed essential for national security – and expectations the Fed will reduce interest rates this year will prevent an outright retrenchment of capital goods expenditures.
One key reason investment has been so sturdy is government incentives. Part of the legislation championed by President Joe Biden provides subsidies, tax credits and other incentives to spur the building of computer chip fabrication plants and the production of electric vehicles, batteries and components.
Companies have also come to accept the advantages of reshoring to make their operations more resilient and less susceptible to conflict and disruptions overseas, said Chris Snyder, executive director of industrials equity research for UBS.
During the past two years, the US has attracted 24 per cent of global foreign direct investment and is now attracting capital at a rate not seen since the 1990s, according to a UBS analysis.
“The last two to three years coming out of the pandemic, we saw what the true cost of outsourcing and the true risk of outsourcing was,” Snyder said.
Moreover, the Fed is expected to cut interest rates this year after the most aggressive tightening cycle in a generation, which will help spur investment, said John Coykendall, vice chair of Deloitte and leader of its US Industrial Products & Construction practice.
Coykendall said there’s as much money being invested to make existing factories more efficient and more automated with new equipment and technology as there is in new facilities.
A survey by Deloitte and the Manufacturing Leadership Council last year found that 92 per cent are experimenting with or implementing industrial metaverse and artificial intelligence investments, and almost four in 10 organisations plan “substantial growth” in their use of metaverse technologies.
When business leaders in a Manufacturing Institute survey last year were asked how they would spend an extra US$1 million, 62 per cent said that they would invest in new equipment. Additional areas of focus for investment included optimising existing equipment and updating existing facilities. BLOOMBERG
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