By Perc Pineda, Ph.D.
Hot of the Presses
The U.S. economy expanded by 6.4% in the first quarter this year on a seasonally adjusted annual rate, according to analysis by the U.S. Bureau of Economic Analysis released on May 27. Plastic industry growth tends to track economic growth measured by gross domestic product (GDP). However, while the industry will be in profit-maximization mode this year, it should consider investment spending on equipment.
Investment spending on equipment swung wildly last year compared to the two prior years, as a shown in the accompanying graphic. After 15.2% and 35.9% declines in investment spending on equipment in the first and second quarters in 2020, the third quarter saw a 68.2% rebound and a 25.4% increase in the fourth quarter. In the first quarter of 2021, investment spending on equipment increased 13.4%. PLASTICS’ forecast calls for a 12.4% increase in investment spending in equipment this year, followed by a 5.4% increase in 2022.
Three Considerations for Equipment Investment
Rising aggregate demand in the economy could necessitate higher production from the manufacturing sector and investments in equipment and labor. Low labor supplies will continue to limit the manufacturing sector’s ability to alter its labor-to-capital ratio, but manufacturers could have room for equipment investment.
Second, low interest rates could help investment spending on high-ticket equipment. The bank prime loan rate is currently 3.25%. Whether it’s captive or in-house financing or leasing, borrowing costs are at historic lows. Manufacturers may consider taking advantage of low borrowing costs for equipment acquisitions.
The third consideration is taxes. President Biden’s tax plan would increase the corporate tax rate from 21% to 28% and does not address full expensing for investment spending on machinery and equipment under the Tax Cuts and Jobs Act of 2017. Full expensing of machinery and equipment begins to phase out in 2023 and expires in 2027, meaning the cost of capital will be higher.
Whether or not the full expensing for investments in machinery and equipment will continue past 2027 is uncertain. But for now, there are incentives for capital investment in plastics machinery and equipment before tax laws change.