CAPITAL INVESTMENTBy Diane C. Swonk, Mesirow Financial

Until recently, businesses have been reluctant to put their money where one might think their profits might take them–capital investment. Instead, companies used their excess cash to buy back stock at a record pace, increase their dividend payouts and improve their market position through mergers and acquisitions. Indeed, very little cash was invested in upgrading capital stock, expanding capacity or betting on future growth. Those trends, however, are about to change as firms are not only committing more to new technologies, but also are trying to catch up on investment deferred at the start of the recovery. The result will be a late-in-the-cycle investment boom and a reacceleration in productivity growth–much like the capital spending surge that we saw in the late 1990s.

Why now? The fundamentals for internal investment in general are improving. First, the headwinds that caused investment to collapse in the wake of the tech bubble have eased, and the investment that was made to address Y2K and the fast growth of the 1990s has largely been absorbed, amortized or is in need of being upgraded or replaced. Second, companies are getting a better handle on how to meet the reporting requirements associated with Sarbanes-Oxley, which diverted both management and financial resources from more strategic endeavors. And finally, corporate confidence has returned, thanks to accelerating exports, falling commercial vacancy rates, rising industrial utilization and the strength of profits (see chart).

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