Easy money, economy expansion, less taxes
According to the Bureau of Economic Analysis, the U.S. economy has extended by 6.4% in the first quarter of the year with a seasonally adjusted annual rate. The growth of the plastic industry leans towards tracking economic growth that is measured by gross domestic product (GDP). Nonetheless, the industry is best to consider investment in new machinery given that it will be in optimum profit-maximization mode this year.
Investing in new machinery has widely fluctuated in the last year in comparison to the previous two years. It had been at 15.2% and 35.9% in terms of declines in investment spending on new machinery, in both the first and the second quarters of the year 2020. However, there was a wild rebound in the third quarter reaching as high an increase as 68.2% and then a 25.4% increase in the fourth quarter as well. As for the first quarter in 2021, investment in new machinery has increased by 13.4% with the expectation of a 12.4% increase in investments later this year, and then a 5.4% increase in the following year 2022.
Three Reflections on ‘why invest in new machinery
The increasing cumulative demand in the economy may possibly require higher levels of production from the manufacturing sector and investments in both machinery and labor. Having low labor supplies continues to limit the industrial sector’s capability to modify its labor-to-capital ratio; Then again manufacturers can still have room for investment in new more machines.
Secondly, having low-interest rates can help invest in premium equipment. Bank prime loan rates are presently 3.25% which puts borrowing costs at a historically low rate, be it leasing, captive or in-house financing. It is a great step for manufacturers to go towards taking advantage of low borrowing costs for attaining new machinery.
The third consideration is taxes. Some tax plans increase the corporate tax rate and may not address full expensing for investment spending on machinery and equipment. Full expensing of machinery and equipment is thought to begin to phase out in 2023 and expires in 2027 which means that the cost of capital will be higher. It is uncertain however whether or not the full expensing for investing in machinery will continue after 2027. As of now, there are inducements for capital investment in plastic machinery and equipment.
