Growing Capital?

What is capital?

Strictly speaking, capital is the stuff that businesses use to make money. Factories have machinery and robots to fabricate their goods; builders have tools and trucks to construct with; service organizations invest in people and processes to provide legal or financial or personal services. Capital is what makes an economy grow, and access to capital–physical or intellectual–is what allows people and nations to become wealthy.

So it’s encouraging when we see analysts call for a capital spending boom. During the recession spending on capital goods–the physical kind–collapsed, as all spending did. Since the economy bottomed, real capital expenditures have grown 20%, while the average for the past six recoveries has been 30%.

So there’s a lot of potential for improvement. Now it’s true, the weakest areas of capital spending are for structures–natural, due to the bubble-fed overbuilding–and for IT equipment–which may be due to technological improvements. But if spending on research and development and industrial picks up, that could have a multiplier effect on the economy, as capital improves productivity which improves earnings which allows for more capital spending.

It’s another way the global economy is poised to accelerate. During a downturn, demand may be deferred, but it won’t be denied.

Douglas R. Tengdin, CFA

Chief Investment Officer

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