The Resurgence of Capex Spending

One of the underlying themes for this year is resurgence in capex spending. This would provide markets with a tailwind. This would lead to businesses spending money to help spur growth, but the root cause of this would be built on a higher level of corporate confidence.

What is Capex Spending?

In short, capex (short for Capital Expenditure) funds are those funds used by a company either upgrade or acquire physical assets. These assets might include building or repairing property, industrial space, or equipment.

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Looking at the spending tendencies a few years ago, we saw that most of the capex spending was on replacement equipment. This occurred for most of the beginning of the recovery; in Q1 2011 replacement spending accounted for 78.1% of all capex. This type of capex spending doesn’t tend to spur sustainable economic growth.

Why Is Capex Spending Important?

We need to see businesses spending monies on new capital expenditures to help grow their businesses past the levels they are currently at; ultimately spurring economic growth. The percentage of capex spent on replacements has dropped back to the long term average of about 55.5%. And the reading that helps to identify new capex spending ticked up 4.1% in Q3, which is well above the low of 2.4% reached in Q2 of 2011.

The outlook on capex spending provides a good sense of optimism on corporate performance which has a direct reflection on the stock market, which can also influence consumer confidence.