Buoyed by optimism about revenue and earnings growth, CFOs say their companies will boost capital spending by an average of 12% during the next 12 months, according to the results of a survey of 136 finance chiefs released Wednesday by Deloitte. But a closer look at the numbers reveals that part of the profit growth would be sustained by sluggishness in hiring and that the capex increases vary greatly by industry.
The finance chiefs, who work mostly for publicly held, North American-based companies that take in more that $1 billion a year in revenues, project an average sales increase of more than 9% and a profit improvement of more than 17%. Such bullish forecasts for growth include “relatively modest” outlays for wages (3%), benefits (4%), and nonlabor inputs (3%), according to the survey. (Nonlabor inputs generally include such things as materials, capital, and energy.)
Why are CFOs predicting such a boost in capital spending? “So many companies, especially when you look at the industrial sectors, have been sitting on the sidelines in terms of capex spending over the past 24 months,” says Sandy Cockrell, national managing partner of Deloitte’s U.S. CFO Program. “They’re at a point where they’re going to have to rebuild [essential] machinery.”
In other cases, companies are looking to increase capex just to keep up with the competition. That’s especially true in the services sector, where a tiny sample of nine CFOs predict their firms would dish out 19% more capital. At Deloitte, the need to keep pace with advances in videoconferencing and other communications technology is driving a spending surge, according to Cockrell.
Cost-effectiveness may be another factor in the contemplated spending rise among services firms. Noting that Deloitte is looking closely at the use of videoconferencing and teleconferencing as part of its effort “to try to get a lot smarter about where our spend is,” Cockrell adds that “we’ve scrutinized our travel budgets in a significant way.”
For the survey respondents as a whole, slow payroll growth coupled with the comparatively strong revenue increases will help fuel the capex surge, Cockrell believes. The respondents to the survey project that the number of domestic workers will rise by just 3%, which roughly matches the projected change in offshore employees and the use of offshore third-party personnel. “CFOs are not too optimistic about getting out the checkbook yet,” the consultant says.
In any event, the survey did not record huge capex forecasts across all industries. To be sure, CFOs working in the energy sector foresee a whopping average increase of 18%, while those in both the manufacturing and wholesale/retail trades think their companies will increase capex by 14%. On the other end of the spectrum, however, are the forecasts of finance chiefs working for financial-services outfits (7%) and telecom, media, and entertainment companies (6%).