Another Sign That Recovery Is for Real

When earnings season rolls around, we like to pay a lot of attention to what business executives have to say about the future. If they're upbeat, we're happy. If they're concerned, we're hunkering down and selling.

But while there's nothing wrong with tuning in to hear what managers have to say, I also like to look at what they're actually doing. And I think one of the best ways to do that is to look at whether companies are actually taking the padlock off their bank accounts and spending money.

To do that, I rustled up the total capital spending from S&P 500 companies. I think the data tell a pretty interesting story.

Source: Capital IQ, a Standard & Poor's company.

It's notable, too, that there are a bunch of companies -- such as Deere, Campbell Soup, and Kroger -- that have yet to release their third-quarter cash flow numbers, so the year-over-year change in capital spending for that quarter is even higher than the graph currently shows.

It's certainly worth noting as well that the quarter's tally -- even once all companies have reported -- will still be well shy of the levels we were at in 2007 and 2008. But that's how business cycles work -- spending peaks, falls off, then starts to climb again. And it sure looks like spending is starting to grow again.

The real impact
Why should we really care about capital spending levels? For one thing, it shows that companies are getting more confident about the future. Even during recessions, companies continue to spend on capital equipment, but they largely confine their spending to what's absolutely necessary, like replacing aging equipment. After all, why bother spending to create new capacity when there's not enough demand to use what capacity you currently have?

But when conditions start to improve and companies see demand starting to build up, it suddenly makes a heck of a lot more sense to start investing in the business again.

So who are these companies that seem to see a brighter future ahead? Based on absolute change in capital spending, energy companies are leading the charge when it comes to breaking out the checkbook. ExxonMobil (NYSE: XOM  ) spent $2.3 billion more during the third quarter than it did last year. And Chevron (NYSE: CVX  ) , Occidental Petroleum (NYSE: OXY  ) , and Chesapeake Energy (NYSE: CHK  ) all increased spending by more than $1 billion.

The oil giants among that group are no doubt being spurred on by high oil prices -- more than $89 at last check. But all of these companies are likely looking ahead to a stronger global economy that will increase demand for energy products and push up prices.

But it's not just energy players that are boosting spending. Not much further down the list, we've got Wal-Mart with a year-over-year increase of more than $600 million, Intel (Nasdaq: INTC  ) jacking up its spending by $418 million, and Amazon.com (Nasdaq: AMZN  ) with a $212 million bump. The specific reasons for the spending are undoubtedly varied -- Wal-Mart adding stores, Intel increasing the number of chips it can pump out, and Amazon adding server capacity.

But the overarching reason for the spending is the same across the board: These companies think that demand will be there to sell more of their products and services. And that's a good sign for the companies doing the spending, and it's a good sign for the economy as a whole.

Even more impact
Of course, it's also important to remember that the money being spent doesn't vanish into the ether -- it goes to other companies.

Take Amazon's increase, for instance. At least some of that spending went toward technology infrastructure, which means servers and other gear. Who cashes in on that? Silicon Graphics (NYSE: SGI  ) , among others. SGI sells servers and storage equipment and counts Amazon among its major customers.

So, Amazon's increased spending is a good thing for SGI and could even mean that SGI will start thinking about hiring new workers. But it doesn't stop there. When SGI has to make more servers, it's going to need to turn to its suppliers to buy the memory, hard drives, and processors (hellllloooo, Intel) that run the servers. And we could continue on from there, but I'm sure you get the point.

When Wal-Mart is building new stores, it's a very similar story, only you've got construction companies and building materials suppliers that will be tapped. And in that case, you've also got knock-on effects from new Walmart stores -- for instance, since they bring shoppers in droves, restaurants and specialty stores tend to do well in the vicinity of Wal-Mart locations. In other words, it's like an espresso shot of commerce.

Miles to go before we sleep
You're not going to catch me saying that we're recovered, but for those not fixated on a bleak picture of the future, there are definite signs that the economy is working its way forward. Capital spending is still below what it was, employment is obviously below what it was, and consumers are still ... well, they're just not well. But if businesses continue to step up their spending like we've seen recently, then it's very likely that we're going to start to see a lot of the other economic data points start to move in the right direction, as well.

Could I be correct that better times are ahead, or am I just part of the irrational exuberance issue?

Chesapeake Energy, Intel, and Wal-Mart Stores are Motley Fool Inside Value picks. Amazon.com is a Motley Fool Stock Advisor recommendation. Wal-Mart Stores is a Motley Fool Global Gains pick. Chevron is a Motley Fool Income Investor selection. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of ExxonMobil, and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Chevron, Intel, and Wal-Mart, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.


Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 1392734, ~/Articles/ArticleHandler.aspx, 4/19/2014 8:42:04 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement