An interesting story today on Bloomberg on something I certainly do not talk enough about - the boon in productivity as capital spending takes share from labor spending in the U.S. Some of this is for automation reasons - especially in manufacturing, but a lot of things we don't think about even in an office setting have improved productivity. Thankfully email and meetings are still around to help ruin productivity or we might have a few million more unemployed!
Not sure there is any 'fix' for this; it's the nature of the way the world is headed and greater efficiency (and lower costs) is the goal of any business, but the focus on capital spending has helped contribute substantially to the labor issues the country faces. Via Bloomberg:
- Cummins (CMI) and Kohl's (KSS) 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, according to “Man vs. Machine,” a Feb. 2 report from Bank of America Merrill Lynch. Employment will grow just 1.7 percent, after a 0.7 percent increase last year, the study projects.
- Inventory rebuilding, low borrowing costs and government policies that include a new tax break on equipment purchases are powerful spurs for capital spending, says Neil Dutta, the Bank of America economist who wrote the report. The job market lacks such drivers and will form a “mediocre” underpinning for household spending, the biggest part of gross domestic product, he said.
- “Machines have the upper hand,” Dutta said, “You see this huge pickup in capital spending, but there isn’t a meaningful increase in employment; it’s being grudgingly pulled along. The consumer is not going to perform the way people expect.”
- More than 8 million positions were cut as a result of the recession that began in December 2007. Investors are focusing on a factory-driven recovery, with the Standard & Poor’s 500 Supercomposite Machinery Index rising 44 percent since March 2010, compared with a 13 percent increase in the broader S&P 500 index.
- The man-machine gap is evident at Cummins, a maker of diesel truck engines and generators. The Columbus, Indiana-based manufacturer has said it may lift capital spending this year to as much as $650 million, or 79 percent higher than 2010’s $364 million. In the same period, it will add about 2,500 workers, a 15 percent increase to its U.S. workforce of 16,500.
- Kohl’s is pursuing initiatives 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 we don’t have to change several thousand signs in each of our stores anytime we run a new promotional event,” Chief Executive Officer Kevin Mansell said.
- 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.
- “At this point, productivity growth is bad news for employment, though in the long term it’s good for the economy,” Shierholz said.
- Even though employment tends to lag behind investment early in recoveries, BofA’s Dutta said the current gap is “unprecedented” in the postwar era: Capital expenditures are expanding at an almost 14 percent pace, while job growth stays below zero, according to calculations he based on a six-quarter annualized change from the ends of the recessions.
- In addition, the “unintended consequences” of policy changes indicate the government may “undercut its own principal aim of job creation,” he said. While the tax bill President 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 policy environment is incentivizing firms to limit job creation,” he said. “The government doesn’t need to stimulate capex, which is doing fine on its own, compared with sectors that are impaired, like the labor market.”