Despite being flush with cash, companies are choosing to forego long-term business investment in favor of short-term gains from stock buybacks and M&A activity. Lily Jamali reports.
Five years into the recovery, Corporate America still has a crisis of confidence. The $1.8 trillion question: Despite having that much cash on their balance sheets, why has investment in business infrastructure like plants and equipment - or "capex" ... failed to find its footing since the recession? Ron Kaplan is the CEO of Trex, which manufacturs decking from recycled materials. He says apprehension dominates. SOUNDBITE: RON KAPLAN, CEO, TREX (ENGLISH) SAYING: "And so I think most CEOs are very reluctant to get themselves overextended. The country is still running deep deficits. Tax policy and fiscal policy is uncertain. You've got a bunch of very careful folks out there." A report out from Morgan Stanley last month on the outlook for business investment was titled "Modest is as good as it gets". Its authors call the wait for capex to accelerate a - quote - "painful and thankless exercise." Long-term business spending - and Research and Development - has fallen short of trend since the 2008 downturn... Analysts say instead, companies are opting to spend on stock buybacks and mergers and acquisitions... for short-term gain. The report finds the average age of industrial equipment has now reached its highest level since - 1938. Trex, which manufactures at two plants in the U.S. has done a buyback. But not at the expense of capex, which Kaplan projects will increase for the next several years. The development of a new product - plastic pellets sold to other manufacturers - has helped. SOUNDBITE: RON KAPLAN, CEO, TREX (ENGLISH) SAYING: "We don't need any additional bricks and mortar. Our factories are at half capacity right now but we're going to take new equipment - install it into existing plants." But companies that stay on the sideline contribute to a vicious cycle: Reuters' Jamies McGeever: SOUNDBITE: JAMIE MCGEEVER, CHIEF MARKETS CORRESPONDENT, REUTERS (ENGLISH) SAYING: "Companies don't invest, they don't spend, they don't hire." And those companies ultimately hurt the broader economy. So when will business investment pick up? McGeever says most analysts and market experts have been expecting it to get better every year since the crisis but... SOUNDBITE: JAMIE MCGEEVER, CHIEF MARKETS CORRESPONDENT, REUTERS (ENGLISH) SAYING: "It hasn't happened yet. and it's always just around the corner. the companies and management and chief executives will only take the plunge and make those investments if they are confident in the structural and long-term health of the economy." But for now, he says a herd mentality among company managers has led to paralysis with no end in sight.