Business Fixed Investments Ramping Up
(February 16, 2012)
Dear Subscribers and Readers,
As the 4Q GDP demonstrates, the death of the American consumer has been wildly exaggerated. That said, there remains another growth engine in the wings. As we discussed in last weekend's commentary (“A US Manufacturing Renaissance”), the combination of +15% growth in Chinese wages, the depressed US job market, the strength of the Chinese Renminbi, and the ongoing advances in manufacturing robotics is now kick starting a “Renaissance” in US manufacturing—specifically those that are capital intensive with minimal labor content. This “onshoring trend,” as President Obama put it yesterday, is coinciding with the highest capacity utilization since late 2007—immediately prior to the beginning of the global financial crisis, as shown in the bottom panel.
With US private consumption remaining resilient (the drag on GDP has been government spending—which is a good thing), and with various capital intensive industries inevitably relocating back to domestic shores, capacity utilization will no doubt test its mid-2000s highs soon enough. That means business fixed investments will rise—and rather dramatically as it has remain very depressed coming out of the global debt crisis (see below chart courtesy of Goldman Sachs).
The inevitable rise in business fixed investments will propel U.S. real GDP growth to over 3% this year. This is not far-fetched, given the new trend of “onshoring,” upcoming capacity constraints, depressed business fixed investments spending over the last several years, and just as important, the record levels of cash sitting on corporate balance sheets (although we realize that a significant amount of this cash is sitting in overseas subsidiaries of US corporations).
Meanwhile, to support our thesis of higher business fixed investments further, U.S. bank lending remains decent and consistent with GDP growth acceleration (see below chart). Year-over-year change in loans and leases is up 2.7% (highest growth rate since May 2009); and up $161 billion (to $6.93 trillion) over the last 12 months. Combined with the benign earnings reports of our largest banks, this growth in lending should lead to higher profits and higher GDP growth in 2012. As a result, the U.S. economy should do well this year, and I believe U.S. financials will outperform this year.
Henry To, CFA, CAIA