By Amrith Ramkumar and Theo Francis
Spending on factories, equipment and other capital goods slowed
in the first quarter among a broad cross-section of large,
U.S.-listed firms, highlighting investor concerns that a key driver
of economic growth is fading.
Capital spending rose 3% from a year earlier in the first
quarter at 356 S&P 500 companies that had disclosed figures in
quarterly regulatory filings through midday May 8, according to an
analysis by The Wall Street Journal of data supplied by Calcbench,
a provider in New York and Cambridge, Mass. That is down from a 20%
rise in the year-ago period for the same companies, the analysis
shows.
Executives at several companies said lingering trade tensions
with China were making them and their customers cautious, raising
the prospect that slower business spending could hamper economic
growth later in 2019 and in 2020. U.S. nonresidential fixed
investment -- which reflects business spending on software,
research and development, equipment and structures -- rose at a
2.7% annual rate in the first quarter, pulling back from a 5.4%
pace in the fourth quarter, the government said last month.
Among the 10 firms that spent the most last year, five lowered
their spending in the first quarter, including Alphabet Inc., Apple
Inc., AT&T Inc. and Verizon Communications Inc. Even so, gross
capital spending for the group only fell slightly, reflecting
continued investments and the impact of one-time items in the
year-earlier period, which benefited in part from the timing of
federal tax cuts. Together, the top 10 capital spenders invested
$38.2 billion in the period, down from $40.7 billion a year
earlier.
Broad trends in capital spending are closely watched by many
analysts and investors, who view longer-term investments by large
corporations as among the most robust sources of future economic
growth. They contend this spending tends to spur further investment
by partner firms and suppliers, and over time to lift worker
productivity and overall economic output.
That is a process that many view as the key to extending the
nearly 10-year old U.S. economic expansion, at a time when trade
dynamics are unsettled, global growth is softening and the effect
of 2017's federal tax cuts is fading.
"Any time there's trade tensions of this kind, it does put a
certain amount of conservatism, I think, into all of our plans for
capital spending," Caterpillar Inc. Chief Executive Jim Umpleby
said on the company's April 24 earnings call in response to a
question about spending plans for Caterpillar customers. The maker
of heavy machinery lowered capital spending to $547 million in the
first quarter from $757 million a year earlier.
Caterpillar's capital spending typically is focused on building
new plants and buying equipment needed to manufacture tools used in
mining and construction. The company has closed factories across
the country in recent years in a bid to boost its continuing
profitability even as it continues to invest in new projects,
executives said at the company's investor day this month.
The first-quarter spending slowdown was most pronounced in the
communication-services and consumer-discretionary sectors, where
capital spending fell from a year earlier. Most large financial and
tech companies reported strong increases for the quarter.
Communication-services company Alphabet, the biggest S&P 500
spender last year, lowered spending by more than a third in the
first quarter to $4.6 billion. Alphabet's outlays include spending
on data centers, servers and office buildings. The company's
spending in the first quarter of 2018 included a more than $2
billion purchase of the Chelsea Market building in Manhattan.
"We continue to expect a sizable investment in both compute
requirements to support long-term growth as well as in office
facilities," said Chief Financial Officer Ruth Porat on an earnings
call April 29.
The overall trend masked dramatic differences among companies,
even within the same sector. While most technology companies
increased capital spending -- the median increase was about 14% --
total spending for the sector declined by about 8% in the first
quarter.
Apple, whose capital spending fell by $1.8 billion compared with
first-quarter 2018, essentially accounted for that decline. The
iPhone maker's spending is typically for manufacturing equipment,
data centers, corporate facilities and infrastructure. An Apple
spokeswoman didn't respond to a request for comment.
Spending growth also softened for some semiconductor companies
that have been ensnared by the U.S.-China trade fight because they
rely on Chinese demand and trade flows to drive revenue. Micron
Technology Inc., one of the 20 biggest spenders last year, slowed
its spending growth in the first quarter and lowered its estimate
for the current fiscal year amid softer-than-expected demand and
swelling inventories of memory chips.
The company typically spends heavily on factories and equipment
needed to build the chips used in everything from smartphones to
computers.
"We believe macroeconomic uncertainty is also contributing to
hesitation in buying behavior at some customers," Micron CEO Sanjay
Mehrotra said on the company's earnings call in late March. Mr.
Mehrotra said a significant portion of the company's spending is
also going toward building cleanrooms in which chips can be built,
as well as toward assembly and test operations.
Other semiconductor companies including Microchip Technology
Inc., which makes microcontrollers used in electronic and
industrial components, have also either lowered capital-spending
targets or projected drops for their current fiscal years.
Microchip wasn't included in the Journal's analysis due to the
timing of its most recent earnings report.
In response to a question about the company's profit
expectations for the 2020 fiscal year, FedEx Corp. Chief Financial
Officer Alan Graf also cited economic unknowns on the company's
earnings call in March. The shipping company lowered capital
spending to $1.1 billion in its latest quarter from $1.4 billion a
year earlier. FedEx has said its capital priorities include
updating its aircraft fleet and expanding FedEx Express hubs in
Memphis, Tenn., and Indianapolis.
"If you could tell me, 'Are we going to get a trade deal done
with China?' And, 'Is Brexit going to come out good?' I could give
you a lot better answer... than I can sitting here at the moment,"
Mr. Graf said.
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com and Theo
Francis at theo.francis@wsj.com
(END) Dow Jones Newswires
May 19, 2019 05:44 ET (09:44 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.