Photo: Dmitry S. Source: Flikr
Capital is the stuff businesses use to make money. Factories have machinery and robots and 3D printers to make stuff; builders have tools and trucks to build stuff; service organizations use people and processes and meeting spaces to care for stuff. And everyone needs computers and data. Capital is what allows an economy to grow, and access to capital – physical and human – enables people and nations to become wealthy.
Percent of firms expanding capital spending in the Philadelphia Fed District. Grey periods are recessions. Source: St. Louis Fed.
So, it’s encouraging when capital spending begins to accelerate in an economy. During a recession spending on capital goods collapses, along with most other spending. Since the financial crisis, real capital spending only grew modestly, compared to prior recessions. During the oil price collapse a couple years ago, the spending on rigs to drilling for oil collapsed. Now, it’s recovered, and it’s even accelerating.
There’s still a lot of potential for improvement. Yes, the weakest areas of capital spending have been for structures like houses and malls and office buildings. This is natural, considering the bubble-fed overbuilding that we experienced a decade ago. And IT spending is just picking up, which may be due to changes in the way companies use computing services, with cloud computing and storage. But as spending on research and development increases, this will have a multiplier effect on the economy: more capital improves productivity, improved productivity improves wages, improved wages improves final demand, and so on.
It’s another way that our economy continues to grow, despite the issues overseas. Growth may have been deferred, but it won’t be denied.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”