Record Pace of Buybacks Leaves Room for U.S. Capex Boom Too

(Bloomberg) -- A chunk of Donald Trump's tax windfall will go to returning capital to shareholders in the form of stock buybacks. But that doesn't mean capital spending can't see a boom, too. 

Consider the Philadelphia Federal Reserve's index tracking how much the region's companies will spend on capex six months from now. The gauge rose 12 percent in February to 40.4, the highest since 1984. The reading was higher only a few other times in history.

The gauge tracks just the Philly Fed's district (most of Pennsylvania, Delaware and southern N.J.), but if that region is any guide, the nation's spending on plant and equipment can get a significant boost. The reading may translate into a growth in capital spending of between 14 and 17.5 percent this year, compared with about 9 percent in 2017, according to Joseph LaVorgna, chief economist at Natixis North America.

The tax relief freed up about $1.5 trillion of extra cash, spurring debate on weather companies will use the money to buy back their own stock, invest in capex or pay down debt. U.S. firms' announced buybacks are on track to hit a record high of $800 billion this year. To LaVorgna, that leaves companies plenty of money to boost spending on property, plants and equipment.

“What's going to be spent on capex versus buybacks misses the point,” LaVorgna said by phone. “What is important is how much spending on capital will grow from a year earlier. It seems that the effect of the tax cuts is going to be large enough that you're going to have a bit of everything, including both capex and buybacks, not either - or.”

A jump in capex of as much as 17.5 percent this year will probably produce a 30- to 60-basis-point increase in gross domestic product, pushing the growth rate to up to 3 percent, LaVorgna said.

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Scott Schnipper

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