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3 Signs Manufacturers Should Be Increasing Capital Spending in 2017

3 Signs Manufacturers Should Be Increasing Capital Spending in 2017

Manufacturing & Distribution

As we settle into another new year, manufacturers across the country are betting big that 2017 is going to be a big improvement over years prior. With the combination of a changing political climate and the advantageous financial opportunities currently available, manufacturers will risk missing out if they do not take the opportunity to increase their capital spending in 2017.

But why is now, more than ever, such a huge opportunity to increase your manufacturing business’ capital spending?

1. Political Changes Ahead

President Donald Trump’s tax plan is focused on cutting taxes for corporations and individuals as well as incentivizing investments in an effort to stimulate the domestic economy. In fact, Trump’s plan specifically states, “Firms engaged in manufacturing in the US may elect to expense capital investment…”

In the past, a corporation’s ability to expense purchases of property, plant and equipment was subject to a bright line of dollar and income limitations. However, under Trump’s new plan, the full cost of capital spending in 2017 can be used to offset and decrease taxable income. This is an opportunity for manufacturers to increase spending on machinery and equipment, which can increase efficiency and decrease tax liability.

2. Rock Bottom Interest Rates

Since the 2008 Recession, the Federal Reserve (FED) has, for the most part, stood by its decision to keep the interest rates, or the Federal Reserve Rate, low. The ability to lower interest rates is a tool used by FED to incentivize businesses to increase expenditures on capital and investments. The lower the rate, the lower the cost will be to borrow money for purchases of expensive property, plant or equipment.

For seven years, FED voted to maintain the Federal Reserve Rate at 0.0-.25 basis points. However, in December 2015, there was an increase in the target rate to .25-.50 basis points, followed by another .25 basis point increase in December 2016, where the rate still remains today.

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In FED’s most recent meeting, the group said, “Expectations are that economic conditions will evolve in a manner that will warrant only gradual increases to the Federal Funds Rate.” That means the door is still officially open for future rate hikes. As a result, manufacturers who remain hesitant to fund capital expenditures through borrowing may end up spending more by waiting to borrow.

3. Lean Manufacturing

According to the National Association of Manufacturing (NAM), output per hour for all workers in the manufacturing sector has more than doubled since 1987. Part of this growth is attributable to the growing idea of lean manufacturing,” a management philosophy focused on identification and elimination of “wastes” to increase production efficiencies and workflows.

While some practical applications of this philosophy are done through evaluations, discussions and quality controls, staying lean is also dependent on the machines and tools available for use. Older equipment has the tendency to break down, and have idol times and output defects, creating waste. To eliminate these inefficiencies, manufacturers can increase expenditures on new capital and machinery, allowing for more refined processes, monitoring and just-in-time output.  

Need Help?

When investing in new capital, you want to first make sure your existing financial house is in order. For advice on capital spending, contact us online or call 800.899.4623.

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Published on January 30, 2017