March 29, 2023

Whither Capital Spending?

Zach Edwards and Brent Meyer

Economic Outlook

The latest results from The CFO Survey suggest that, on average, firms revised up their outlook for the U.S. economy. (The survey closed March 10, before the recent financial market issues.) On a scale of 0 to 100, CFO optimism about the U.S. economy was 55 — modestly higher than last quarter but well below the historic average of about 60. And, while still a bit sluggish relative to a typical expansion, CFOs revised up their expectations for real GDP growth over the next year to 1.4 percent from 0.7 percent in the prior survey. Importantly, the probability that respondents assigned to negative growth over the next year fell to under 20 percent after two consecutive quarters at over 30 percent. Firms' upgraded outlook comes despite continued increases in interest rates, as monetary policymakers maintain efforts to curb stubbornly high inflation. While firms' overall outlook appears to have improved modestly, our semiannual questions on firms' expectations for capital spending suggest the picture is not quite as clear.

Capital Expenditure Conundrum

Capital spending is one key factor that shapes the forward trajectory of the economy, contributing to GDP growth and setting the stage for both longer-run productivity growth and increasing standards of living. It also happens to be an aspect of firm decision-making that is typically thought of as interest rate sensitive, since higher interest rates put upward pressure on borrowing costs, which tends to dampen investment (and vice versa for lower interest rates), all else held constant.

Given a recent increase in interest rates, one might expect to see firms pulling back on capital expenditures. However, research conducted using data from the 2022Q4 CFO Survey suggests that capital expenditure for roughly 70 percent of firms was unaffected by interest rate hikes. In fact, according to the Bureau of Economic Analysis (BEA), business fixed investment rose at an annualized rate of 4.7 percent over the second half of 2022, the largest two-quarter increase since 2021Q3, despite a 2.75 percentage point increase in the federal funds rate over the same period. (Residential investment, conversely, fell at an annualized rate of 26.5 percent over the second half of 2022). These findings leave us with two questions that we highlight using data from the 2023Q1 CFO Survey: What are firms' investment expectations? Are we starting to see higher interest rates affect the spending decisions of firms?

To Invest or Not to Invest…

Instead of asking firms to provide an estimate of their anticipated growth in capital expenditures over a particular period in the future, twice a year we field an in-depth module of questions designed to elicit whether a given firm is planning capital investment (either via equipment or structures investment), what the rationale for choosing to invest (or not) is, and expectations for the dollar amount of capital spending they plan to engage in over the next six months.

This time, a little less than 60 percent of firms anticipate investing in equipment and 30 percent expect to engage in structures investment over the next six months, a typical breakdown in our survey's short history. Yet, while the share of firms anticipating investment in equipment and structures have remained broadly unchanged since we began asking these questions in the third quarter of 2020, the rationale for choosing whether to invest shifted this quarter. Furthermore, firms' expectations for the amount of capital spending they intend to undertake over the next six months has slowed appreciably compared to their 2022Q3 expectations for the period of September 2022 through March 2023. 

Firms' Investment Decision Rationale

For the 30 percent of firms expecting to spend on structures investment over the next six months, most respondents cite the need to 'increase capacity,' followed by 'repair/replacement.' For the roughly 60 percent of firms anticipating equipment purchases over the next six months, the majority cite 'repair/replacement' as the purpose of their expenditure. These results are not wholly surprising: Equipment depreciates at a much faster rate than most structures (i.e., office buildings, factories, warehouses, etc.). Moreover, in an environment where annual revenue growth expectations are still relatively strong, an inclination to increase capacity and expand is consistent with the desire to meet robust demand.

These investment rationales have changed modestly since the last time we fielded these questions in the third quarter of 2022. Six months ago, a smaller share of firms cited 'increase capacity' or 'repair/replacement' as the purpose of their investment, while a larger share reported undertaking capital expenditure to reduce costs.

For those firms not engaging in capital investment, the results are more striking. Here, we can start to see some influence of higher interest rates creep into firms' decision-making. The increases in response rates of 'unfavorable financing' and 'lack of funding' are quite salient. Furthermore, many firms responded that they need to preserve cash and have no need to expand capacity. Thus, while there was a modest improvement in overall sentiment, the prevalence of these responses suggests that, for some firms, concerns of economic slowdown persist.

Anticipating a Slowdown?

In addition to gaining some insight into firms' rationale for engaging in capital spending, we also elicit the current value of a given firm's structures and equipment (i.e., 'property, plant, and equipment' or, for economists, their 'capital stock') and ask for a nominal dollar amount of capital spending they anticipate dolling out over the next six months.1

Relative to the third quarter of 2022 (the last time we asked these semiannual questions), expectations for capital investment slowed materially this quarter. On average, capital investment expectations slowed from 10.9 percent over a six-month period (from September 2022 to March 2023) to 3.6 percent over the next six months (through September 2023). How significant of a softening is this? Admittedly, it is hard to tell given the “lumpy” nature of capital investment (which could contribute to noise from survey to survey) and the short period of time we have been asking this question (we only have five prior points of comparison). Also, those figures are averages for the entire panel of responses. Alternatively, the median (or typical) respondent's growth rate slowed much less dramatically — from 5.4 percent in the third quarter of 2022 to 2.8 percent as of the current survey.

While we have only a handful of prior survey results to compare, we can look at how well average expectations for structures and equipment spending from CFOs in our panel correspond to the estimates from the BEA for nominal structures and equipment spending. First, a few notes on the construction of these aggregates. For our CFO Survey results, we sum the total property, plant, and equipment value for all firms in every other quarter to get an estimate of the capital stock. Then, for every other quarter, we sum the amount of structures and equipment investment firms intend to undertake over the next six months and divide that by the capital stock. That gives us an expected growth rate of capital investment over the next six months. For our comparison series from the BEA, we sum together aggregate nominal structures and equipment investment (excluding 'intellectual property products') and calculate a two-quarter (or six-month) growth rate. In the chart below, we also lead firms' capital spending expectations by two quarters to directly compare how well firms' expectations aligned with the official data from the BEA. In other words, the dates in the chart below line up with the quarter in which our respondents' expectations would theoretically come to fruition, not the survey period in which the data was collected.

Before we dive in, there are a few caveats to note. First, there will likely be differences between our estimates and the BEA's for two reasons:

  1. We do not incorporate depreciation of capital stock into our estimates (which should lead to higher growth rates, on average and over longer time horizons, from The CFO Survey expectations series).
  2. We do not have enough data to determine if there are predictable seasonal patterns in structures and equipment expectations. In other words, the BEA data have been seasonally adjusted, and CFO expectations for capital spending have not.

What we find is a somewhat mixed performance. On the positive side, expectations for the six-month periods ending in 2022Q1 and 2022Q3 appear to have aligned very well with the estimates from the BEA. However, expectations for the six-month period ending in 2021Q3 of a 13.3 percent increase in capital spending seem wildly at odds with the official data. There are a couple of intriguing explanations for this. First, these expectations were formed during a period of significant supply chain disruption and shipping bottlenecks, and firms may have been anticipating significant changes to their means and location of production; changes that ultimately did not play out to such a degree. Second, and more plausible, is that the average for that quarter was inflated by a few strong expectations for capital spending growth. This explanation becomes even more likely when looking at median growth rates, which are less susceptible to the effects of outliers. The median expected growth rate for the period ending in 2021Q3 was 4 percent — much closer to the actual estimate of 2.5 percent from the BEA. Going forward, firms, on average, anticipate capital spending to increase by 3.6 percent over the next six months. Time will tell whether this is a useful forecast for equipment and structures investment as reported in the NIPAs.


While the share of firms anticipating spending on structures and equipment investment over the next six months was little changed from the third quarter of 2022, the expected pace of those expenditures slowed notably since that same time (over a period ending in March 2023). Moreover, despite a modest upgrade to firms' collective view of the outlook for the U.S. economy, an increasing share of firms cited 'unfavorable financing' and a 'lack of funding' as reasons for not engaging in capital investment. This evidence suggests that firms are beginning to feel the effects of higher interest rates as monetary policy continues to tighten.


Overall capital investment plans tend to be over a much longer time horizon (i.e., three to five years or so). Yet, by asking firms about the amount of spending they are engaging in over a short window (i.e., six months), in effect we are gauging the process being made toward those overarching plans. Our hope is to mitigate conflating actual spending with changes in longer-run plans and, in the attempt, to align expectations much more closely with the way the BEA measures investment in the National Income and Product Accounts (NIPAs).

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