Feb. 1 (Bloomberg) -- Evidence of a self-sustaining U.S. recovery is emerging on the factory floors of Texas Instruments Inc. The second-largest U.S. chipmaker will spend almost $1 billion this year to expand three factories and open a fourth to fill orders.
The need to rebuild industrial capacity after the largest decline on record in 2009 is boosting capital spending and may spur hiring. Beneficiaries are led by technology equipment- makers Intel Corp., Applied Materials Inc. and EMC Corp., as well as industrial product providers General Electric Co. and Rockwell Automation Inc.
Capital spending will increase the total productive capacity of the U.S. economy above its pre-recession level of December 2007, helping gross domestic product grow at a 2.7 percent annual rate in 2010, according to the median forecast of 67 economists in a Jan. 14 Bloomberg News survey. That would be the fastest rate since 2006.
“Our business is growing so we have to build out capacity,” Dave Pahl, Texas Instruments’ director of investor relations, said from Dallas. “Our customers are increasing what they’re building, so that’s increasing our revenue.”
Business executives say spending will increase further as profits rise -- third-quarter earnings increased 10.8 percent, according to Commerce Department figures, the most in more than five years -- and demand strengthens. Of U.S. companies followed by Morgan Stanley analysts in New York, 38 percent intend to raise capital spending over the next three months, up from a low of 3 percent in August.
‘Very Powerful Recovery’
“The groundwork has been laid for a very powerful recovery in capital spending,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. “It won’t take much of a spark to get companies to start spending and hiring.”
GDP rose 5.7 percent in the fourth quarter as factories revived assembly lines and consumers and companies spent more, the Commerce Department reported on Jan. 29. Purchases of equipment and software increased 13.3 percent, the most since the first quarter of 2006.
Federal Reserve officials, who left the benchmark lending rate unchanged in a range between zero and 0.25 percent on Jan. 27, noted in their policy statement that “business spending on equipment and software appears to be picking up.”
Shares in companies that make those goods are poised to extend their rally, investors say. The Russell 3000 Producer Durables index and the Standard & Poor’s 500 Semiconductor Equipment Index are each up more than 29 percent over the past 12 months, exceeding the 27 percent rise in the Standard & Poor’s 500 index.
Cash Flow
“People are buying equipment,” said Mario Gabelli, chief executive officer of Gamco Investors Inc. in Rye, New York, which owns Texas Instruments and Rockwell Automation among its $20 billion under management. “As cash flow continues to improve, as companies get more confident, they need more efficient plants,” Gabelli, 67, said in an interview in New York.
Morgan Stanley’s January business conditions index survey found that 34 percent of companies plan to increase hiring, up from 8 percent in August.
“Rising jobs will provide the gains in income and confidence needed to support consumer spending,” Richard Berner, co-head of global economics at Morgan Stanley in New York, said in a telephone interview.
Payrolls rose by 13,000 jobs in January, according to the median forecast of 62 economists surveyed by Bloomberg News ahead of the Labor Department’s Feb. 5 report. That would be the second month of job creation since the recession began in December 2007. Manufacturing payrolls are forecast to have fallen by 23,000, the least since the recession’s onset.
Davos Panel
The unemployment rate is forecast to have held at 10 percent in January, the economists’ survey showed. White House economic adviser Lawrence Summers suggested during a panel discussion at the World Economic Forum in Davos, Switzerland Jan. 29, that the jobless rate may not fall quickly as companies invest in boosting productivity rather than hiring.
Non-farm productivity rose at an 8.1 percent annual rate in the third quarter of 2009, and the median forecast of 47 economists surveyed by Bloomberg News is for output per hour to have risen at a 6 percent rate in the fourth quarter. The average quarterly growth rate of productivity over the past 20 years is 2.4 percent.
The median forecast of 54 economists in a Bloomberg News survey released Jan. 14 is that it will take until the end of 2011 for the unemployment rate to fall to 9 percent.
9 Percent?
Dean Maki, chief U.S. economist for Barclays Capital Inc. in New York, says the rise in capital spending makes that forecast too pessimistic. He predicted that the nation’s unemployment rate will fall to 9 percent by the end of 2010.
“Businesses are starting to spend on goods; that means they’ll also start spending on employment,” Maki said in an interview on Bloomberg Television after the GDP report. “The first quarter as a whole will show substantial job growth.”
Business-led job growth would be good news for President Barack Obama. A survey released Jan. 13 by Hamden, Connecticut- based Quinnipiac Polling Institute found 54 percent said they disapproved of the way Obama was handling the economy. The survey of 1,767 registered voters had a margin of error of plus or minus 2.3 percentage points.
Tax Breaks
In his Jan. 27 State of the Union address, the president proposed extending through 2010 a temporary tax incentive that encourages businesses to accelerate purchases of equipment. The 50 percent write-off may give a boost to capital expenditures if approved by Congress.
“It will help companies to make capital investments, which is what you need in a weak economy,” Monica McGuire, senior policy director of taxation for the National Association of Manufacturers in Washington, said in a telephone interview.
Slack remains in the economy. About 68.6 percent of U.S. manufacturing capacity was in use in December, compared with an average of 81 percent since records began in 1948.
Technology stocks have been rising for 10 months in anticipation of a capital expenditure rebound, and gains have slowed for many companies, said Craig Berger, a technology analyst at FBR Capital Markets in New York. Texas Instruments shares, which are up 51 percent over the past 12 months, are more expensive on a relative-value basis than 61 percent of the companies in the S&P 500.
‘So Far, So Fast’
“Investors are willing to bet we’ve got to start spending on capex after cutting back,” Berger said. “But there’s a lot of push and pull in the markets because we’ve come up so far, so fast.
Small businesses, generally those with fewer than 500 employees, and with less cash or access to financing, will limit their investments this year, according to the National Federation of Independent Business. A near-record low of 18 percent said they plan to make capital expenditures over the next three to six months, according to the industry group’s January survey.
“Capital spending is on the sidelines,” said William Dunkelberg, NFIB chief economist in Philadelphia, in a telephone interview.
By contrast, Seagate Technology, the world’s largest maker of hard-disk drives, raised its 2010 sales forecast on Jan. 21 after reporting it sold a record 49.9 million drives in the most recent quarter. While Seagate expected business buyers to resume purchasing, it didn’t predict such a quick rebound, Steve Luczo, the company’s chief executive officer, said in an interview.
Real Signals
“As we get further and further away from the implosion we all felt at the end of 2008, you have more confidence that the signals you’re seeing are real,” said Luczo, 52, whose company is based in the Cayman Islands and run from Scotts Valley, California.
Dallas-based Texas Instruments is hiring 250 workers to open a new chip-manufacturing plant in Richardson, Texas, that will eventually employ 1,000. It’s also expanding three other plants in the state. The company forecast Jan. 25 that first- quarter profit of 44 cents to 52 cents a share would beat analysts’ estimates.
Santa Clara, California-based Intel, the world’s largest chipmaker, is also raising capital spending, Chief Financial Officer Stacy Smith, 47, said in a Jan. 15 interview. Intel shares are up 45 percent over the past year, and of the 49 analysts who cover the company, 36 maintain a “buy” rating.
This “will be the first year in about five years where we are going to grow the employment in the company and make some critical R&D bets,” Smith said.
Chip Equipment
Increased capital spending bodes well for companies such as Santa Clara, California-based Applied Materials, which supplies chip-making equipment to Texas Instruments and Intel, chief executive Michael Splinter, 59, said.
“During 2008 and 2009 a lot of capacity came off line in the semiconductor industry. That has to be replaced,” he said. “In the next six to nine months I think we’re going to see increased spending on new capacity.”
EMC, the world’s biggest maker of storage computers, said on Jan. 26 that sales would be $16 billion this year, exceeding the $15.4 billion average estimate of analysts in a Bloomberg survey and a 14 percent increase from 2009.
David Goulden, chief financial officer of Hopkinton, Massachusetts-based EMC, forecasts a 3 percent to 5 percent increase in spending on information technology this year.
“We’re seeing interest in investments for growth, new opportunities and integrations, as opposed to what used to be mostly focus on cost-cutting,” he said on a Jan. 26 conference call with analysts.
Spending Plans
Surveys of corporate spending plans show increasing optimism. The Philadelphia Federal Reserve Bank’s monthly index of manufacturing capital spending plans over the next six months rose to 24.5 in January, the highest since September 2008. Similar indicators produced by the Dallas, Richmond, and New York Federal Reserve banks show the same trend. The New York capital expenditure index rose to 33.33 last month, the highest since May 2007.
American industrial capacity -- the number of plants and amount of equipment available to produce goods, mine raw materials, and generate power -- fell by 1 percent last year, the largest decline on record.
“We’re seeing a pretty good bounce back,” Jeffrey Immelt, chief executive of Fairfield, Connecticut-based General Electric, told analysts Jan. 22. “We think equipment orders should be positive for the year.” GE shares have risen 26 percent in the past year.
Purchasing Management
Smaller suppliers are also seeing the benefits. The National Association of Purchasing Management-Milwaukee reported its capital equipment index was at 60 in January, the highest since August 2008.
Milwaukee-based Rockwell Automation, which makes industrial automation and power controls, raised its 2010 forecast after reporting Jan. 27 it made a profit of 54 cents a share in the most recent quarter, topping the 36-cent average analyst estimate.
“We believe we’re at the early stage of a recovery,” CEO Keith Nosbusch said in an interview. Companies “de-stocked to the point where any need had to be filled immediately, one to one, as opposed to before where they were able to take it out of their inventory supply chain.”
Rockwell Automation shares are up 77 percent over the past 12 months. “That’s a stock we like,” Gabelli said.
LaVorgna sees capital expenditures rising 14.3 percent from the fourth quarter of 2010 to the fourth quarter of 2009, largely in the second half of the year, and 10 percent over the same period in 2011. He pointed to the level of new orders in the December ISM factory index, a leading indicator of capital spending, which rose to 64.8, the highest in five years.
“Capital spending has already improved despite low capacity use,” LaVorgna said. “You had a massive collapse in capex, and those are almost always followed by massive recoveries.”
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