2021 Capex Outlook: Is Now the Right Time to Deploy Capital Reserves?

Wilmington Trust Senior Economist Rhea Thomas and M&T Commercial Equipment Finance Group Manager of Direct Originations Scott Weissmann analyzed the 2020 trajectory of capital expenditures and what to expect for the rest of 2021.

Last fall, M&T Bank’s John Wolfe, Commercial Equipment Finance, wrote about the importance of preserving capital during the economic uncertainties caused by the pandemic. Many businesses did just that and are now looking for an opportunity to deploy working capital by expanding facilities, upgrading equipment, or embarking on an acquisition. Many are wondering if the right time is now.

Capex has been on the rebound since 3Q 2020

As of 1Q 2021, total business capital expenditures (capex) is now ~1% above pre-pandemic levels (4Q 2019), driven by investment in equipment and intellectual property products, which includes software.

Equipment capex has been led by strength in information-processing equipment, up 26% from pre-crisis levels (Figure 1), as the pandemic has increased the need for remote working and other virtual technology solutions. However, strength in software investment is unsurprising and will most likely continue to trend upward. Even before COVID, firms were investing in Fourth Industrial Revolution technologies to increase productivity and reduce production costs.

Data as of 1Q 2021. Sources: Macrobond, Bureau of Economic Analysis.

While the transportation sector is trending up since 3Q 2020, it is still not yet back to pre-pandemic levels. This is likely due to supply chain constraints and certain sub-sectors, like commercial coach and student transportation, weighing heavily on the positive industry drivers.

Industrial and other equipment has maintained a positive trend in 2021. Leading sectors include manufacturing, health care, construction, and food processing. We maintain optimism as the entirety of the equipment sphere is trending upward.

Given the robust economic outlook, business capex should continue to recover as we move into the second half of the year.

Data as of 1Q 2021 (large businesses), April 2021 (regional manufacturers). Sources: Macrobond, Business Roundtable, Federal Reserve Banks of New York, Philadelphia, Dallas, Richmond, Kansas, Bureau of Economic Analysis.

In our view, there are four key drivers of a more positive economic outlook: the virus, the vaccine, fiscal stimulus, and monetary policy stimulus. All of these are moving in the right direction, bringing the U.S. economy to an inflection point as we expect an improved health situation allowing the services sector to reopen, the labor market to heal, and excess consumer savings to be unleashed. Surveys of large firms and manufacturers point to plans to increase business investments in the coming months. Small businesses, which were harder hit by the pandemic, currently appear less optimistic compared to pre COVID, though capex plans improved in April as the economy started to reopen.

What does this mean for your business?

Now might be the time to invest in your business. The projection for increased consumer spending and a rebounding economy should signal the right time to upgrade business operations. Businesses are wise to consult with their trusted financial advisors to create a plan for the best use of capital this year, given the potential for rising inflation and interest rates as the economy strengthens.

Third-party trademarks and brands are the property of their respective owners.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. Investing involves risks and you may incur a profit or a loss. This article is not designed or intended to provide financial, tax, legal, accounting, investment, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.