Corporate spending is back on the rise
The market held up remarkably well during the pandemic. This is partly because corporate and consumer balance sheets were so strong. Government stimulus helped bolster these balance sheets, as did other programs, like pausing all student loan payments.
That couldn’t last forever, and now, we’re on the eve of restarting student loan payments. This will be a major test to see if consumer balance sheets are as healthy as we think they are, which could determine how severe a possible recession might be.
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Companies are changing where they spend money.
High inflation and rising interest rates tend to put pressure on businesses. That’s exactly what we’re seeing today. And it has forced those businesses to reconsider where they put their money.
That’s why spending on buybacks has slowed down this year. Corporations are choosing to hold on to cash rather than return it to shareholders. Share buybacks fell more than 10%.
However, not all spending has decreased. In the third quarter, spending actually rose for one specific category: capital investment.
We’ve been “pounding the table” on the supply-chain supercycle for more than a year. It refers to a huge wave of spending on things like construction, factories, and infrastructure in the U.S.
Corporations took the supply-chain supercycle a step further back in August. That’s when they started to invest in hard assets for the first time in more than a decade.
And this new data only confirms that the trend is underway. Capital investment grew more than 20% year over year in the third quarter.
Companies are still improving their facilities and supply chains despite higher interest rates. They know that even in the face of rampant inflation, consumer demand is still strong. They have to improve their own businesses in order to take advantage of it.
One sector, in particular, is benefiting, specifically industrials.
One of the surest ways we can see the rise in capital investments is by looking at commercial and industrial (C&I) loan growth. These are short-term loans used for funding projects or purchases.
Sustained C&I loan growth only happens when companies are investing in growth. Significant capital investments are often expensive. Companies opt to fund these projects through C&I loans rather than relying on cash flows.
C&I loans have continued to rise this year despite growing concerns of a recession.
As you can see, after dipping during the pandemic, C&I loans are on the rise again. Companies are investing even in the face of higher interest rates.
Said another way, we’re seeing more spending at a time when it’s harder to spend. That’s why we’re so bullish on more capital investment going forward.
It’s also why we believe that industrial firms will be big winners in both 2022 and 2023.
Capital spending doesn’t look like it’s slowing down anytime soon. We believe industrial companies will continue to benefit from this investment wave… no matter what happens in other parts of the economy.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research