The Coming Capex Boom

 | Sep 06, 2021 01:09AM ET

This article was originally published at TopDown Charts .

  • A capex boom draws closer amid a confluence of bullish factors

  • Global concerns such as continued supply chain backlogs and soaring shipping costs highlight the need for improved supply chain investment

  • US infrastructure has aged due to a lack of investment in the last 50 years. Political support appears to be growing for a refresh.

  • Green energy requires significant public and private funding

The US Congress is inching closer to a broad infrastructure bill that would send trillions of dollars into the economic system to revitalize deteriorating fixed assets. Last week’s impacts from Hurricane Ida only serve to underscore the immediate need for investments in new roads, bridges, and maybe even subways.

Other factors are at play to spark a capex boom. We’ve covered the are soaring. The Harpex Shipping Cost Index is double its 2005 high while the infamous Baltic Dry Index is at decade-highs. The years following those prior peaks saw jumps in shipping capex. The cure for high prices? High prices.

Easy Credit/h2

Back to the US, another macro condition that serves to bolster capex optimism is loose lending standards. Banks are willing and able to dole out credit to companies to a degree not seen in the last 30 years. Historically, when bank lending standards are this easy, S&P 500 firms pounce on the chance to invest. So far, there has only been a minor uptick in capex spending, but it has turned the corner. We expect continued upward momentum.

Aging Assets/h2

Near-term easy money is one thing, but arguably the bigger story that could drive a longer-term capex boom is the state of infrastructure in the US. The average age of fixed assets (government) eclipsed 25 years recently. (Compare that to the mid-20th century average of about 13 years.)

Not surprisingly, government investment as a percent of GDP has drifted back near all-time lows as shown in this week’s featured chart. Of course, we know that legislation will likely be passed in the coming weeks to boost spending, but investors might be underappreciating the powerful combination of macro factors driving both public (government) and private (corporate) investment.

Featured Chart: Underinvestment