Capital Expenditures Remained Buoyant Amid Moderate Economic Growth in First Quarter

Perc Pineda, PhD
Chief Economist, PLASTICS

In the first quarter, the U.S. economy experienced a slower pace of growth, with real Gross Domestic Product (GDP) expanding at 1.3%, revised down from the initial estimate of 1.6%. This downward revision indicates a more modest economic performance than previously anticipated. 

Additionally, Personal Consumption Expenditures (PCE), a key driver of the economy, was revised down to 2.0% in the first quarter from the earlier estimate of 2.5%. This indicates that consumer spending, while still growing, was not as robust as initially thought. The ongoing high-interest rate environment likely contributed to the 4.1% decrease in durable goods consumption. 

Corporate Profits Decreased in the First Quarter 

Preliminary estimates show that corporate profits also decreased. Along with the slower pace of economic growth in the first quarter, corporate taxes showed some pullback. Following three consecutive quarters of growth, corporate profits with inventory valuation and capital consumption adjustments decreased by $21.1 billion in the first quarter, down by 0.6% from the previous quarter’s increase of $133.5 billion. Similarly, after-tax corporate profits decreased by 1.7%, or $48.7 billion, in the first quarter following a 3.9% increase in the previous quarter.

While profits from financial corporations increased by $73.7 billion in the first quarter, profits in the non-financial sector fell by $114.1 billion. The stark contrast between financial and non-financial corporate profits underscores the uneven impact of economic conditions in the first quarter. High interest rates have been favorable to the financial sector but unfavorable to the non-financial sector, compounded by weaker consumer spending.

Could the Plastics Industry’s Corporate Profits Face Challenges? 

Although detailed first-quarter corporate profit data for many industries are still being released, it is likely that they have followed the trajectory of the broader financial and non-financial sectors of the economy. In the fourth quarter of last year, durable and non-durable goods manufacturing saw pre-tax corporate profits with inventory valuation and capital consumption adjustments increase by $25.0 billion and $11.9 billion, respectively. However, other non-durable goods manufacturing, including plastics products, experienced a corporate profit decrease of $1.9 billion in the same period. 

Considering that the main customer of the plastics industry is the manufacturing sector—such as automotive, consumer electronics, building materials and construction industries—the profitability of the plastics industry will be influenced by the performance of these end markets. The unevenness of the impact of the current monetary policy stance across different sectors of the economy will continue to impact the plastics industry. 

Capital Expenditures, However, Remained Buoyant 

Despite weaker household spending and a decline in corporate profits in the first quarter, nonresidential investment spending, which can serve as a reasonable proxy for capital expenditures (CapEx) on a macro scale, has shown resilience with ten consecutive quarters of growth. In the first quarter, nonresidential investment spending expanded by 3.3%, faster than the earlier estimate of 2.9%. Additionally, investment spending on structures, albeit minimal, was revised upward, showing an uptick of 0.4% in contrast to an earlier estimated downtick of 0.1%. Investment spending in intellectual property products also saw a significant revision, increasing from 5.4% to 7.9%. Higher investment spending on technology, including in artificial intelligence (AI), most likely explains the robust growth. Given that CapEx is a leading economic indicator, its growth suggests a cautiously favorable outlook for sectors that include the end markets of the plastics industry.

In summary, the first quarter presented a mixed bag of economic indicators for the U.S. economy. While real GDP growth slowed and corporate profits experienced a decline, the resilience in nonresidential investment spending is notable. The disparity between financial and non-financial sectors underscores the uneven impact of high interest rates, which benefited financial corporations but weighed heavily on other industries.

Despite these challenges, the ongoing strength in capital expenditures, particularly in technology and intellectual property investments, suggests that businesses are still committed to long-term growth and innovation. As detailed data continues to emerge, these trends will provide further insights into the broader economic trajectory and sector-specific performance. The future path of the U.S. economy will likely hinge on how these varying factors balance out in the coming quarters – starting with the Federal Reserve Bank’s mid-year assessment of where the interest rates should be when the Federal Open Market Committee meets on June 11 and 12, 2024. The financial market currently expects the Fed funds interest rate to remain at its current target range of 5.25% – 5.50%.