By Francis P. Rybinski, CFA, Chief Macro Strategist & D. Harris Kere, CFA, Investment Strategist
Comments made by the CEO of one of the world's leading professional services firms sparked an internal debate among our team. Interesting observations were made on current opportunities in the market—specifically, that the global firm is seeing solid spending by its clients on technology. These comments brought up a key point of contention that is constantly debated in macro circles, and our internal discussion led us to peel back the capex numbers and confirm the main area where growth exists (Exhibit 1).
Exhibit 1: Capex sub-components of GDP tables
|Equipment: $1.27 trillion annually, +1.0% YoY|
|Structures: $502 billion, -8.2% YoY|
|Software: $458 billion, +9.8% YoY|
|R&D: $441 billion, +7.7% YoY|
Source: Bureau of Economic Analysis, Haver. As of September 30, 2019.
Conversely, we can look at the capex proxy of durable good shipments to get a sense of the environment for non-software/R&D capex (Exhibit 2). In aggregate terms, this capex proxy has grown a measly 5.2% since 2008 (note that is aggregate growth, not per year).
Exhibit 2: Durable goods shipments
Source: Haver. As of August 2019. *Note: we are using the shipments component because that is what translates into GDP and is more reliable than orders which can be cancelled.
This means that the capex proxy of durable goods (i.e., non-software/R&D tech) has been on a steady decline from the '90s (Exhibit 3). This is a direct contrast to software and R&D capex as percentage of GDP, which is on a steady incline (Exhibit 4).
Exhibit 3: Capex proxy of durable good shipments as % of nominal GDP
Sources: BEA, Haver. As of December 31, 2018.
Exhibit 4: Capex: Software & R&D as % of nominal GDP
Sources: BEA, Haver. As of December 31, 2018.
This gets to the heart of a key question that is constantly debated in macro circles. While aggregate capex dollars are not growing that much, is the outcome of the tech capex more impactful (i.e., higher margin) so that it can outweigh the slower aggregate spending? Said another way, are the success rates and efficacy high enough to offset tighter aggregate budgets? Productivity numbers would suggest that the answer is no, but time will tell.
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