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.
Support for further capex
A number of factors remain supportive of further business capex going forward:
Elevated company bank balances: Firms are in a good place to expand capex thanks to large balances amassed since the start of the pandemic. Bank balances of nonfinancial businesses have surged by $951 billion relative to the pre-pandemic trend levels (Figure 4). They have been padded by stimulus funds (Paycheck Protection Program (PPP) for smaller businesses), supportive corporate credit issuance conditions (for larger firms that are able to access capital markets), and reduced travel, employment, and other expenses in the wake of the pandemic. Loan demand remains weak according to comments made by banks during their first quarter earnings calls, and the Fed’s survey of bank loan officers released in April. However, indications of soft loan demand don’t necessarily portend lower capex going forward. Firms may not be seeking loans because many already have funds needed on hand.
Loan standards loosening: The Fed’s bank loan officer survey also noted that on net, banks eased standards for commercial and industrial loans as of 2Q 2021. Though standards still remain tighter than pre-pandemic levels, easier lending conditions should be supportive of capex going forward as companies start to draw down balances and look to borrow again.
Fed policy expected to remain accommodative: We expect the Fed to keep interest rates unchanged through at least 2022 in light of its new monetary policy framework, as it looks through an expected temporary overshoot of inflation (given near-term upside pressures including base effects and supply chain disruptions).
Potential infrastructure spending: President Biden’s American Jobs Plan and American Families Plan both include a number of infrastructure spending and tax incentives to encourage development in manufacturing, clean energy, and critical industries (AI, biotech, climate science, computing, communications). This could spur new business capex in related sectors. However, both plans also include a number of proposed corporate tax increases, which could weigh on business sentiment and investment. Final details that will be important in determining the ultimate impact on the capex outlook will evolve in the coming months. They are likely to differ from the initial proposals given the Democrats’ razor thin majority in both the House and the Senate, and extensive negotiations that will need to take place to get legislation passed.
Figure 4: Nonfinancial business bank balances* have surged