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Pandemic accelerates shift in US companies' capex as IT, consumer giants invest

The coronavirus pandemic is changing the shape of capital investment by U.S. companies, accelerating shifts away from heavy industry and toward consumer services and information technology.

Capital expenditure by U.S. public companies increased to $1.021 trillion in the 12 months through March 31, up 3.6% from the previous 12-month period and 71.3% higher than it was a decade earlier, according to an S&P Global Market Intelligence analysis. To align historical data with the most recent available 2020 figures, all years in this analysis refer to 12 months ended in the first quarter.

In the past decade, there has been a shift in which kinds of companies are supplying that investment, with the IT and consumer discretionary sectors now accounting for 21% of total U.S. public capex, up from 15% in 2011.

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The boom in shale gas and oil, which saw the U.S. become the world's largest oil producer, involved capex spending in the energy sector climbing from $189 billion in 2011 to $301.8 billion in 2015, accounting for 33% of total U.S. public capex in that year.

But as oil prices slumped with crashing demand during the early weeks of the pandemic, investment sharply scaled back. At $184 billion in the 12 months ended March 31, 2020, the energy sector was still the largest investor in capex, but its share was down to 18% of the total. With oil majors revising price forecasts lower and former leading light Chesapeake Energy Corp. among a number of oil groups declaring bankruptcy, the figure is set to slide further.

In response to the slump in the price of oil, energy companies have scaled back investment programs across the board. Among them, Exxon Mobil Corp. slashed its capital budget for 2020 by $10 billion, to $23 billion, while Chevron Corp. announced it was cutting its own capital spending for the year by $4 billion, or 20%, to $16 billion.

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Steel boom turns to bust

Similarly, the industrials sector has been rocked by the impact of the coronavirus.

"Capacity utilization remains very low at 68.6%. With corporate profitability having been crushed by the disruption due to virus containment measures, there is little incentive to invest in capex as yet. This is likely to hold back the broader recovery and is a key factor why we doubt the U.S. economy will recover all of its lost output much before the end of 2022," James Knightley, chief international economist at ING, wrote in a research note.

While the recovery in industrial production beat expectations in June, rising 5.4%, it was still down 11% from the pre-pandemic level in February. The low usage of existing infrastructure reduces the need for further investment by companies already preferring to conserve cash.

Industrial groups had a mini capex boom in 2017-2018, encouraged by a Trump presidency that prioritized boosting traditional manufacturing jobs in the Rust Belt. Industrial companies increased capex by 19.4%, from $110 billion in 2017 to $131.3 billion the following year.

The steel industry was one of the main beneficiaries of President Donald Trump's protectionist trade policy with wide-ranging import tariffs. Former blue chip U.S. Steel Corp. scored a profit of $1.12 billion in 2018, its best performance since the end of the commodity super cycle in 2008 and a surge from a loss of $1.64 billion in 2015.

The company launched a number of capital-intensive investments, reopening blast furnaces to much fanfare. That has now gone into reverse as a result of the coronavirus disruption, with the company closing mills in Michigan, Illinois and Indiana and delaying multiple investments, contributing to total U.S. steel production slumping 36.6% year on year in May.

The Amazon effect

Capex is growing faster in less-traditional areas as services extends its domination over manufacturing in the U.S. economy. In the 10-year period through the first quarter of 2020, energy capex declined 3% but the consumer discretionary sector surged 155%, from $47.6 billion to $121.2 billion, led by Inc.'s spending on distribution facilities.

In the first quarter, Amazon's capex was $6.8 billion, the company's highest ever quarterly investment, driven by purchases of property and equipment for Amazon Web Services' data centers.

"We've already seen this change over the decades ⁠— it is of diminished significance what that sector [manufacturing/energy] of the economy does anyway," said Simon MacAdam, senior global economist at Capital Economics. "The virus will supercharge some of the trends that were already under way before the virus started."

One of those trends is the investment by the tech giants, which has resulted in annual information technology capex rising 128% in a decade, from $39.2 billion to $89.4 billion by the end of the first quarter of 2020. The concern is that investment will also slow in these more dynamic sectors as a result of the changes wrought by the coronavirus.

Capex killer

"There's a longer-term risk associated with a change in behavior," MacAdam said. "If households, not just businesses, and consumers ... permanently do less travel, don’t go to the shops, most capex is in physical buildings, and if people work from home more or buy online, you just need warehouses."

However, MacAdam said such a long-term restructuring of peoples' lives and routines is unlikely, citing the expectation after the Sept. 11, 2001, terrorist attacks that there would be less demand for air travel, which proved unfounded.

"I think we can overstate how much behavior is triggered by the virus," MacAdam said. "What's more important is what the virus does in terms of shifting debates and changes that were already under way. So, will we need less capex in the future? Will we need less travel in terms of going to work? For particular sectors that are very investment heavy, there could be lasting effects of that."