By all indications from recent earnings reports on Wall Street, the economic recovery is well and truly on its way. However, it’s important to ask: Just how firm is that footing? And what practices are companies employing that could be dangerous for the economy’s long term health?
One key element to economic growth that’s currently being ignored (or repeatedly brushed aside in favor of businesses holding on to massive amounts of cash) is capital investment. What is the affect that decision will have? The answer can be seen in worsening productivity figures.
Back in 2009, when the economy was shaky, corporations got mean and lean, cutting out all extras and putting pressure on employees to work harder to keep their jobs. Every efficiency that could be squeezed out of the situation has been. Now, not surprisingly, productivity has stalled. In fact, since 2011, productivity has grown less than 1 percent per year (as contrasted with 5 percent in 2009).
Capital investment lagging
So, just what’s missing? The answer is capital investment, which is down 30 percent in recent years. That’s left workers with outdated tools to do their jobs, be it a computer, forklift, or the advanced training needed to help send overall efficiency higher.
In saving all they can, businesses have sacrificed spending to upgrade the tools and invest in personnel, elements that help productivity improve. In fact, the Bureau of Economic Analysis (BEA) reports that the average age of business equipment in the workplace is some 7.4 years, the oldest it’s been in 20 years. In 2010 and 2011, capital-per-worker-hour dropped for the first time since 1987, the first year the BEA began tracking the data.
This overall drop in productivity is also reflected in the nation’s gross domestic product (GDP), which is at a 65-year low. In part, some of the hesitance on the part of companies to invest in themselves has come from government uncertainty. It’s not that long ago that the nation was worrying about the “fiscal cliff” and a government shut-down.
There’s also been an important tax break that was allowed to expire. Companies used to be able to deduct up to $500,000 on investments in new equipment on their corporate taxes. With the expiration of the law in 2013, that figure has been reduced to $25,000 annually.
This lack of enthusiasm for capital investment has also been reflected on Wall Street, where companies who reinvest in themselves have not been rewarded with higher stock prices. Instead, those companies who used their cash to repurchase stock or raise dividends (instead of purchasing new equipment) have prospered.
In the end, however, this is short-sighted thinking. Better productivity benefits not only workers (in the form of higher wages) and business owners (more profit), but the overall economy as well.