Published in Manufacturing

Manufacturers expect first pullback on capex since 2009

BY Sunday, January 05, 2020 05:09pm

Even as the state and national economy continues to eke out growth, manufacturers expect to reduce their capital spending in 2020.

Annual capex has eased since 2017 when corporate tax cuts helped to sustain spending, and some strategists predict manufacturers will continue to defer investment decisions, slash costs and hoard cash in the coming year. Less spending on technology, machinery and other equipment could suggest business executives are becoming less confident in the economy, experts said. 

CFOs across all industries predicted capital spending would grow by 3.6 percent over the next 12 months, down from their outlook for 9.4 percent growth in the previous period, according to a third quarter survey by Deloitte.

However, the manufacturing sector is expected to keep an even tighter lid on capital spending.

Manufacturing executives predict their capex will decrease by 2.1 percent in 2020, according to data from the Institute for Supply Management. That compares to a reported 6.4 percent increase in capex among manufacturers in 2019. However, a significant portion of respondents — 21 percent — reported spending less in 2019 compared to the previous year. That’s nearly double the ratio of respondents who said they decreased capital spending in 2018. 

Manufacturing executives who responded to the ISM survey were equally split in their expectations for increasing (29 percent) and decreasing (29 percent) capital expenditures in 2020. Forty-two percent expect capex to remain the same as in 2019.

Executives who expected lower capex planned to cut spending by an average of 29 percent, which outpaced the 21.3 percent average spending increase in the other group. 

According to ISM, the survey suggests annual capex among manufacturers will decline for the first time since 2009. That forecast comes even as 58 percent of manufacturing execs expect higher revenue this year and nearly eight in 10 believe profit margins will improve or stay the same, according to Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee.

The sector expects to keep employment mostly flat this year, growing jobs by just 0.1 percent. 

Cyclical changes

Bob Roth, president and CEO of industrial capital equipment manufacturer RoMan Manufacturing Inc. in Wyoming, Mich., said the expected contraction in capex is a result of the sector being in the backside of a cycle that has higher highs and lower lows than the general manufacturing cycle because of the lifespan of capital equipment. 

“There is nothing on my radar screen that makes me think this part of the business cycle is an outlier,” Roth told MiBiz. “I see it as normal.” 

In anticipation of the slowdown, Roth expects RoMan — which has itself invested in expansion, CNC equipment and machining equipment over the past several years — to lower its expenditures in the coming year. 

“In both growth as well as making sure that we’re staying up to snuff on our own technology, we’ve also ourselves spent heavily in the last six years, and we’re not going to replace it all over the next six years,” he said. “It has a longer lifespan than that.” 

However, geopolitical difficulties have also limited RoMan’s investments, Roth said, citing the U.S.-China trade war and uncertainty over the new United States-Mexico-Canada Agreement in 2019.

“I have to make sure that this balance sheet is really strong because whether the ball is going to bounce right or bounce left, that strong balance sheet will keep me in the game,” Roth said. “I think that sometimes gets lost on our friends in Washington. All of this uncertainty that they create, even if it’s for a good reason, will basically tighten up businesses and they’ll spend less money on capital equipment, on R&D, and on talent development.”

About 38 percent of executives in the ISM survey cited domestic economic conditions as the main reason for adjusting capital spending plans, while just 3 percent blamed tariffs. About 44 percent cited other unspecified factors.

Very little of the decision-making process has to do with 2020 being an election year, according to Roth. 

“(Investing in) large-scale capital equipment is such a long process,” he said. “It never starts or stops because the whole world is consumed with the last three months of an election year.” 

Time to invest?

The manufacturing sector remains in a vulnerable position after contracting for part of last year, although reports show a turnaround may begin in the first half of 2020. 

Several specific sectors of manufacturing, including fabricated metal products, furniture, textiles, electrical equipment and appliances, still expect to spend more than average on capital investments next year, according to the ISM data. 

If interest rates remain low, 2020 should be an optimal time for these sectors — and all companies in the region — to make capital investments, according to Jim Robey, director of regional economic planning services at the Kalamazoo-based W.E. Upjohn Institute for Employment Research.

“The reality is that in real money, interest is close to zero (and) now is the time,” Robey said during a presentation last month at The Right Place Inc. annual economic forecast event. “As you start to think about things like industry movement, Industry 4.0 and other things, there is no better time to invest, because the cost of capital is close to zero when you take inflation into account.” 

In addition, the need to make capital investments, specifically in automation and technology, is “hugely important” for the long-term success of manufacturing in West Michigan and will boost the overall regional economy, which he expects to grow at a slower pace this year. 

“Economic development has always been about jobs,” he said. “My argument is that maybe economic development needs to be about jobs and capital investment.”

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