Corporate profit boom is driving spending in this key area, not office buildings

tags:

As corporations rake in record profit, big businesses this year have been investing more on improvements than any point before the pandemic, according to a new Oxford Economics report.

By the second quarter of this year, capital expenditures had stage a historic rebound from the onset of the COVID crisis, eclipsing a prior pre-pandemic level by 1.4%, Lydia Boussour, lead U.S. economist, wrote in a Thursday note.

Not surprisingly, the bulk of the spending boost since late 2019 has been in technology-related investments, driven in large part by the scramble by corporate America to support remote work.

Specifically, the top spending increase was on information technology equipment, up 20% in the second quarter from the fourth quarter of 2019, while software investment was next, up 17% for the same stretch.

Most of the upswing in capital expenditures can be attributed to a surge in spending on information processing equipment (including computers and hardware) and software which have surged well past their pre-pandemic levels as
companies rushed to invest in labor-saving and remote work technologies, Boussour wrote.

DavidBianco, DWS Groups Americas chief investment officer, pointed tothe increased digitalization of S&P 500 SPX, -0.77% business mix and the accelerated digitization of the economy during the pandemic as key drivers of the profit surge, in a recent market note.

The S&P 500 was up almost 20% on the year Thursday, while the Dow Jones Industrial Average DJIA, -0.78% gained 14% and the Nasdaq Composite Index COMP, -0.87% rose 18.3%, according to FactSet.

Shares of software giants Microsoft Corp. MSFT, -0.52%, Adobe Inc. ADBE, -0.41% and Oracle Corp ORCL, +0.16% were each up more than 32% so far this year through Thursday.

On the flip side, Oxford Economics noted that spending on structures dropped by roughly 20%, including on office buildings, plants and malls, where investments remain severely depressed as weaker demand for office space, sky-high material prices, and labor shortages have exacted a toll.

Read: Office building prices tumble in heart of big American cities

Companies have loosened their purse strings as corporate profit, before taxes, swelled to a record high of $2.79 trillion in the second quarter, up 16% from the fourth quarter of 2019, according to the report.

The amount of cash and liquid assets on hand at corporations also hit $6.4 trillion in the first quarter, up 22% from pre-pandemic levels, which along with ongoing demand for goods despite supply-chain bottlenecks should support production and capex growth in 2022.

Read: A record number of U.S. companies storm bond market Tuesday to borrow

Leave a Reply

Your email address will not be published. Required fields are marked *