, Businesses Capital Spending Surging, Will Boost Wages Over Time, The Nzuchi News Forbes

Businesses Capital Spending Surging, Will Boost Wages Over Time

, Businesses Capital Spending Surging, Will Boost Wages Over Time, The Nzuchi News Forbes

The latest report on durable goods orders shows a surge of capital expenditures by businesses. Orders are not just rebounding from the pandemic, they are far exceeding pre-pandemic levels. Non-defense capital goods excluding aircraft are running more than ten percent above 2019 levels. (Aircraft are excluded in the most common measure because of their high variability from one month to another, and because many of the orders are for export.)

Companies purchase capital equipment for three reasons: to replace aging equipment, to add capacity, or to substitute equipment for labor. In today’s tight labor market, automation is the big story.

Replacement of old equipment is fairly stable. Variability from one year to the next reflects companies’ cash positions and outlook for the future. In tough times, a business nurses old equipment for another year. In good times, they buy shiny new machines to replace the old stuff. Low interest rates and, for small business, large cash balances from PPP loan forgiveness, encourage replacement. But that can hardly explain such high volume of orders.

Adding capacity makes sense in a time of shortages, but that does not seem to explain current capital expenditures. Capacity utilization in the industrial part of the economy (manufacturing, utilities and mining) remains below 2019 levels, which itself was not particularly high by historical standards. And some of the current demand for manufactured goods is temporary, borrowing from the future. Most of the home improvement projects now underway, for example, are probably projects that would have occurred in future years. The pandemic kept people at home and from spending money on vacations, restaurant meals and concert, so home improvement was a logical choice. As they feel comfortable with vacations, look for home improvement to decline. The same is probably true of the recent surge in bicycles, boats and RVs. The overall economy is not growing yet above the trend line of pre-pandemic data, so a desire to increase capacity is unlikely.

, Businesses Capital Spending Surging, Will Boost Wages Over Time, The Nzuchi News Forbes

That leaves labor substitution as the reason for the recent surge of orders for machinery, equipment and computers. Many surveys of business owners and corporate executives show that labor availability is a key issue. Help Wanted signs abound. So the good news about companies spending money on automation is that the robots aren’t replacing workers so much as filling empty positions for which workers are not available.

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The tight labor market will last for years, many executives know. They see the “Silver Tsunami” of older workers retiring. The baby boom lasted from 1946 through 1962, so retirements will be strong until the last years of this decade. The current tight labor market is just the beginning of a long-term challenge for employers. Some executive have seen the scary chart of weak growth of the working age population, while others simply look at the demographics of their own employees.

The increase in capital expenditures is a good sign for the economy. More equipment means higher productivity per worker, on average. With slow growth of the population, productivity is the way to keep the economy growing. And higher productivity usually passes through to higher wage rates. Although business leaders are not, in most cases, consciously trying to help workers, their capital goods orders are leading to higher wages. In Adam Smith’s words, they are guided “as if by an invisible hand” to help others.

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