Yesterday, Supply Chain Matters posted a commentary relative to ISM’s August PMI report noting continued positive momentum for U.S. manufacturing. Beyond just parroting of business and traditional media regarding the news, we raised caution on important warning signs relative to sustaining such momentum.Today’s published edition of the Wall Street Journal adds more evidence of caution, observing that many U.S. manufacturers have neglected to invest in replacing aging capital equipment.
The WSJ cites a recent Morgan Stanley report indicating that the average age of industrial equipment in the U.S. has risen above 10 years. Growth of all types of capital spending by U.S. firms increased 3 percent in 2013, and is forecasted to be 3.8 percent this year. These levels are far below the Morgan Stanley historic average of 8 percent.
Instead, firms are investing in acquisitions, stock buy-back programs and capital investments in other faster growing economies in Asia and Latin America. The WSJ cites a Dealogic statistic which indicates that in the first-half of this year, firms have shelled out $80.7 billion for acquisitions, compared to $69.5 billion in this same period of 2013. That equates to the potential of a lot of capital equipment investment.
Of more concern, geopolitical events are changing rather quickly. China’s huge market potential has increasingly become more challenging for foreign based manufacturers. In a separate news report, The WSJ cited a recent survey conducted by The American Chamber of Commerce in China, whose members include manufacturers, which indicated that 60 percent feel less welcomed in China, compared with a 41 percent sentiment a year ago. Responding to a new added question as to whether respondents feel that foreign firms are being singled out for attack, 49 percent indicated yes. Europe’s manufacturing sector still remains in doldrums while Latin American countries, with continue to be challenged with global currency and inflation challenges. Mexico seems to be the new exception.
Thus, previous manufacturing capital investment bets within emerging economies may be sidelined at this point because of fast changing global events. That places even more dependence on U.S. manufacturing resources, hence the growing need to continue to invest for added productivity and newer U.S. based equipment.