Cash Flow

$300B Capex Lost in Recession Goes Unreplaced

A huge dollar amount has vanished from corporate America’s investment in capex.
David KatzMarch 9, 2016

Nearly $300 billion in capital expenditures cut by U.S. companies during the recession had not been replaced through May 2015, according to a 15-year study of capex released recently by the Georgia Tech Financial Analysis Lab.  

Capital spending for U.S. non-financial firms with revenues of more than $100 million dove “significantly during the recession,” falling to about 3% of revenue in 2009 from 4% in 2008, Charles W. Mulford and Biro Condé, the study’s authors, write.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Small as it seems, that single percentage point translates to a huge dollar amount that has vanished from investment in the fixed assets of corporate America, according to the study. And companies’ reluctance to replace the spending on their property, plant, and equipment may be helping to slow the growth of the U.S. economy, according to Mulford.

“There is the same amount of hesitation now that we saw after the recession. There aren’t the animal spirits for growth that we typically see in expansion,” he says. “It’s just not there.” 

To be sure, by 2014, capex had recovered to about what it had been before the economic downturn, according to the study. (See Exhibit 1, below, from the Georgia Tech study.) “However, companies have not taken steps to increase capital spending to make up for the recession-induced decline,” the authors assert. “We estimate the cumulative amount of capital expenditures effectively lost to the recession to be $296.5 billion.”


In the period since the recession, companies have only raised capex enough to replenish their existing fixed assets each year, rather than hiking it to levels that would replace the the $300 billion, says Mulford, director of the lab and a Georgia Tech accounting professor.

Many companies have been “treading water” in terms of buttressing such things as their buildings and factories and fleets, he notes, and, as a result, “companies weigh less” in terms of heavy assets.

“There’s no investment for growth,” he says. “We’re just barely investing to replace, and we’re not making up for the lean years.”

The study doesn’t address whether corporate infrastructure is collectively decaying. “But it’s implying that the fixed asset base is getting older,” Mulford says. “We’re replacing things more slowly than we did.”

Where has all the cash that might have been invested in capex gone? Has it vanished entirely or popped up elsewhere? The findings of the study solidly support the latter conclusion.

If corporations had wanted to, they could have saved enough operating cash flow (also known as free cash flow) via capex cutbacks during the recession to replenish capital spending when things got better, according to the study. Before the recession, capex made up about 43% of operating cash flow. During the recession, to preserve resources, companies slashed capex as a percentage of operating cash flow to a mere 31% of operating cash flow.

By 2011, however, the ratio of capex to operating cash flow had recovered to 42% of revenue. The authors note that from 2005 to 2008, the four years before the downturn, and from 2011 to 2014, the four years after it, that ratio was quite stable, ranging between 41% and 44%.

“Firms are apparently committing consistent amounts of operating cash flow to capital expenditures. However, any cash conserved by reducing capital expenditures during the recession has not been committed to increased spending in subsequent years,” the authors argue. (See Exhibit 2.)

Exhibit2 Capex_OCF

Instead, besides being held in reserve for a rainy day, much of the cash that might have gone into refreshing company infrastructure has ended up in stock dividends and buybacks, according to the Georgia Tech study. To be sure, the metric of dividends and buybacks as a percentage of revenue dove off a cliff between between 2008 and 2009. But it shot up significantly through 2014. (See Exhibit 5.1, below.)

Many experts have seen the quality of being “asset lite” as a boon to companies, of course, enabling corporations to please investors with their streamlined balance sheets and their purportedly efficient use of capital.

Exhibit5.1 Div+Stock Rep_RevOn the other hand, companies’ widespread decisions to hoard cash and invest in dividends and share repurchases rather than pump money into their hard assets has helped slow U.S. economic growth, according to Mulford.

That caution may derive from a lack of optimism on the part of the C-suite, which in turn may be reacting to government tax and regulatory policies that may slow growth, he adds.

Or it may not. Does the tepid investment in capex reflect the ongoing technology and automation boom and a resulting falloff in the need to invest in fixed assets? Mulford wonders.

“Or is it a reflection of underinvestment [indicating that] we really need to have that move up? That’s a question I really can’t answer.”