People need to spend to get out of recession but companies are not increasing jobs just productivity.
The government works on a plan to benefit companies looking to make capital expenditures, but not on plans to help with the labor market. Capital expenditures, also called CAPEX, are expenditures creating future benefits. Companies are accelerating equipment purchases to boost productivity, reinforcing an unprecedented gap between capital spending and employment in the U.S. that’s restraining a labor-market rebound.
Corporate investment will rise 11 percent this year as sales pick up, following a 15 percent gain in 2010. Employment will grow just 1.7 percent, after a 0.7 percent increase last year.
Inventory rebuilding, low borrowing costs and government policies that include a new tax break on equipment purchases are powerful spurs for capital spending.
But with a huge pickup in capital spending, there isn’t a meaningful increase in employment.
The Institute for Supply Management’s manufacturing index has risen for seven consecutive months, surging in February to the highest level since May 2004. While the labor market is improving gradually, unemployment remains high. The jobless rate may hold at 8.9 percent in March for a second month, the lowest since April 2009.
Investors are focusing on a factory-driven recovery, with the Standard & Poor’s 500 Super composite Machinery Index rising 44 percent since March 2010, compared with a 13 percent increase in the broader S&P 500 Index.
The capital-spending booms is expected to continue this year and into next year, helped by emerging markets, however, after a recession, business are leery to make large investments in more labor.
Another example of capital expenditures lowering available jobs is an initiative that Kohl’s, a Wisconsin-based company, is pursuing. They plan to reduce labor input as part of an increase in capital spending this year to $1 billion from $761 million in 2010. The department-store retailer is installing electronic signs in 500 locations, up from 100 in 2010, in a program that will cover the entire chain by the holiday season of 2012. This means payroll savings, because they don’t have to change several thousand signs in each of their stores anytime they run a new promotional event.
Some companies are hesitating to hire permanent staff which means temporary staffing firms, especially those in information- technology and engineering may outperform this year. Unsteady markets and insurance costs are driving these decisions.
This helps explain why productivity last year climbed 3.9 percent, the most since 2002, while labor costs fell 1.5 percent after a 1.6 percent drop in 2009, the first back-to-back declines since 1962-63, government data showed.
As demand strengthens, corporate spending is going to be the heart of the recovery and will unleash favorable second-round effects in the labor market.
Corporations hit by the financial crisis recoiled to a greater extent than ever before and would benefit to take advantage of record amounts of cash generated by healthy profits and faster growth overseas.
The economy already has added jobs for five consecutive months, and economists predict another gain for March. Small businesses also are joining the transition.
In addition, the unintended consequences of policy changes indicate the government may undercut its own principal aim of job creation. While the tax bill President Barack Obama signed Dec. 17 allows businesses to write off 100 percent of some purchases in 2011, there’s no similar incentive to speed up hiring. The Fed’s commitment to keep its benchmark interest rate near zero for an extended period also facilitates lower-cost financing for machines.
The administration’s goal to double overseas sales of American-made goods is another plus for investment over hiring since the U.S. export sector is capital intensive rather than labor intensive.
The policy environment appears to be giving incentives to firms to limit job creation. Capital expenditures do not seem to need incentives, unlike the labor market.
Rising sales are causing companies to rebuild inventories after slashing them by a record amount during the recession, which ended June 2009. There’s plenty of room to expand: Machinery and software assets are growing at the slowest pace since World War II, and capital expenses as a share of GDP still are below pre-slump levels.
In other words, government will give incentives to businesses that make capital expenditures, businesses will increase productivity but not labor. The expectation is that as consumer spending continues to rise that the market will stabilize. Once employers can start to feel comfortable in anticipating the market they will begin to increase labor, or so we hope.
