Photo: M. Minderhoud. Source: Wikimedia
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. Source: St. Louis Fed.
So, it’s encouraging when capital spending begins to accelerate in an economy. During recessions, spending on capital goods collapses, as all spending does. Since the financial crisis, real capital spending only grew modestly, compared to prior recoveries. During the oil price collapse a couple years ago, spending on drilling rigs collapsed again. Now, it’s come back, and it’s even accelerating a little.
And there’s still a lot of potential for improvement. Now it’s true, the weakest areas of capital spending have been for buildings. This is natural, considering the bubble-fed overbuilding that we’re still working through. And IT spending is just picking up, which may be due to changes in the way companies access computing services. Now, 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 is poised to accelerate. Demand may have been deferred, but it won’t be denied.
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