Companies will try to buy more capital goods in 2022, but supply issues will limit what they can actually acquire.
The main driver of business capital spending is generally economic growth, with additional impacts due to high labor costs and low interest rates. These three factors are driving businesses to increase their purchases.
The economy has surpassed pre-pandemic levels as measured by gross domestic product, and greater growth is expected, as evidenced by the the Wall Street newspaperForecast survey. Even though the forecast for the second half of 2021 is lower than it had been, the expected gains are still above average.
Corporate profits reflect growth, although unincorporated owners have made less progress.
Labor shortages are also pushing companies to import more computers and machines. We used to worry that robots would take jobs; now we hope the robots will fill the vacancies. Hiring should get a little easier as the months go by, with additional government UI benefits now a memory. And a lot of the stimulus payments received by people who don’t work have been spent.
Companies pay higher wages when they can find workers. At first, companies gradually increased their wage offers, but now the widespread competition for workers is pushing up wages considerably. The unions, while not a big factor overall, are demanding higher wages and threatening to strike. Thus, the shift to more automated production, sales and customer service will reduce costs.
The final issue for the demand for capital spending is funding. Fortunately, companies have a lot of money. Paycheck Protection Program (P3) loan advances and forgiveness represent a huge cash gain, but overall economic growth has also helped.
Borrowing costs for businesses remain at historically low levels, although long-term interest rates increase slightly. Banks have eased their credit standards after tightening in 2020. And Wall Street welcomes new issuance of shares by companies raising cash. In short, companies globally have liquidity and financing capacity, although some companies and sectors affected by the pandemic are struggling to finance capital expenditures.
However, long delivery times for equipment will reduce expenses. Equipment production has fallen behind due to both supply chain issues and labor shortages. Most computers and machines are complex products with a multitude of components. A missing on-off switch can force a business to leave goods in the workshop instead of shipping them. Millions of dollars in equipment can be stuck in limbo for lack of a hundred dollars in switches.
Labor is limited throughout the economy, but manufacturers face two additional challenges. First, the long term trend is for young people to avoid manufacturing. Young men whose fathers moved from high school to a factory were told to go to college. Many don’t follow college advice, but shy away from manufacturing.
In addition to recruiting challenges, many factories are facing the silver tsunami of gray-haired workers retiring and taking their skills with them.
When capital goods are finished and ready to ship, the transportation system struggles to deliver them to customers. This is true internationally, with ships anchored outside ports, and nationally because many trucks lack drivers.
In this environment of strong demand and limited supply, prices are rising. Machine prices in general had gone up two percent, more or less, for many years, but recently prices have gone up six percent. Computer prices had fallen most years of the past decade, but have now risen due to the high demand for laptops to help remote workers and servers for cloud computing.
Price hikes and long lead times will deter some companies from buying more equipment, but as soon as these issues ease a bit, expect demand to increase.
Companies that sell capital goods will sit in the catbird seat, at least for a while. In a few years, rising interest rates will dampen demand, and when the Federal Reserve finally tries to stifle inflation, capital spending will fall. Until then, it’s the big city.