One of the signs of a resurgent corporate America, one that will start hiring at least some of those 11 million or so unemployed Americans who currently living it up on unemployment compensation, will be a surge in capital expenditures. Companies will start spending money to expand their operations, and will need to hire people to operate those operations. Recent data suggest that ramp up may be a very long, very low-grade one.
According to the Fed’s latest Flow of Funds report, US nonfarm, nonfinancial firms raised a net $380 billion in 2009. “One might expect this to reflect an increased appetite to invest. But firms have primarily been borrowing more from the bond market to compensate for borrowing less from other sources,” Capital Economics’ John Higgins writes in a research note.
Companies were less likely to tap the equities markets, meaning the total raised in 2009 was down $327.5 billion, a record low, as Higgins points out.
Admittedly, this “financing gap” was less negative in the final quarter of 2009 than in the prior three quarters. Nonetheless, even if the financing gap turns positive this year, we doubt it will become very large. Firms are likely to remain reluctant to invest heavily given the weakness of final demand and a still low rate of capacity utilization. And to the extent that they do choose to ramp up their capital expenditure, they will probably prefer to finance it with their cash flow.
As we saw this morning, capacity utilization remains well below its long-term average. Real demand remains in the doldrums. The economy is going to need a spark, a new Cabbage-Patch Kid, a new Internet, a new something, to get the whole job-creation machine going again.