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


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

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