Companies Accelerate Spending as U.S. Productivity Bypasses Jobs
March 27, 2011, 7:28 PM EDT - Businessweek
By Shobhana Chandra
March 28 (Bloomberg) -- Cummins Inc. and Kohlfs Corp. are accelerating
equipment purchases to boost productivity, reinforcing an unprecedented gap
between capital spending and employment in the U.S. thatfs 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 gMan vs. Machine,h 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 gmediocreh
underpinning for household spending, the biggest part of gross domestic product,
he said.
gMachines have the upper hand,h Dutta said in a telephone
interview from New York. gYou see this huge pickup in capital spending, but
there isnft a meaningful increase in employment; itfs being grudgingly pulled
along. The consumer is not going to perform the way people expect.h
The Institute for Supply Managementfs manufacturing index has
risen for seven consecutive months, surging in February to the highest level
since May 2004. While the labor market is gimproving gradually,h unemployment
remains gelevated,h according to the Federal Reserve. The jobless rate may hold
at 8.9 percent in March for a second month, the lowest since April 2009, based
on the median forecast in a Bloomberg News survey ahead of Labor Department
figures due April 1.
eVery Deep Jobs Holef
Even if payrolls rise more than economistsf median estimates of
195,000 this month, thatfs gnowhere near the kind of growth we need to see,h
said Heidi Shierholz, an economist at the Washington-based Economic Policy
Institute. gWefre still near the bottom of a very deep jobs hole from which
wefre just starting to climb out.h 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 & Poorfs 500 Supercomposite Machinery Index rising 44 percent since
March 2010, compared with a 13 percent increase in the broader S&P 500
Index.
gThe capital-spending boom will continue this year and into next
year,h helped by emerging markets, said Robert Baur, chief global economist at
Principal Global Investors, which manages $232.4 billion. gCompanies
underinvested to such an extent and for so long that therefs a great deal of
catch-up to be done.h
More Gains
Baur, based in Des Moines, Iowa, said investors have
opportunities for more gains this year in technology, energy, manufacturing and
basic materials including commodities and mining. Principal Global owns shares
of Eaton Corp., AGCO Corp., and Joy Global Inc., which have risen an average of
55 percent in the past year.
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 2010fs $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.
Menomonee Falls, Wisconsin-based Kohlfs 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.
Payroll Savings
This means gpayroll savings, because we donft have to change
several thousand signs in each of our stores anytime we run a new promotional
event,h Chief Executive Officer Kevin Mansell said on a Feb. 24 conference
call.
Some companies are shifting to gmore flexibility in employment,h
which means temporary staffing firms, especially those in information-technology
and engineering, may outperform this year, said Tobey Sommer, an analyst at
SunTrust Robinson Humphrey Inc. He recommends Tampa, Florida-based Kforce Inc.,
whose stock has gained 15 percent in the past 12 months, and On Assignment Inc.,
in Calabasas, California, which climbed 19 percent.
gThe firmer footing for the economy is real, but itfs all
relative,h said Sommer, in Nashville, Tennessee. Businesses still have a gmuted
desire to hire,h and gtemporary hiring is a hedge against uncertainty.h
Rising Productivity
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.
gAt this point, productivity growth is bad news for employment,
though in the long term itfs good for the economy,h Shierholz said. gThe need to
do more to create jobs is an open and shut case, but politically, itfs not going
to happen.h The debate in Congress has shifted to the deficit, so gthe job-
market recovery is going to be a long slog.h
David Bowers, a managing director at London-based Absolute
Strategy Research Ltd., is more optimistic. As demand strengthens, gcorporate
spending is going to be the heart of the recoveryh and will unleash gfavorable
second-round effects in the labor market,h he said. gWhen that happens, people
will be surprised at what a powerful effect itfll have on consumer finances and
consumer spending.h
eBack in the Saddlef
Corporations hit by the financial crisis recoiled to a greater
extent than ever before and gneed to get back in the saddleh to take advantage
of record amounts of cash generated by healthy profits and faster growth
overseas, he said.
The economy already has added jobs for five consecutive months,
and economists predict another gain for March. Small businesses also are joining
the transition. Payroll-accounting manager Paychex Inc. said March 24 that
checks per client rose the most in at least two years for the quarter ended Feb.
28. Most of the Rochester, New York, companyfs customers have fewer than 20
people on staff.
Building momentum still may take time. Finance chiefs in a
quarterly survey released March 9 by Duke University and CFO Magazine trimmed
hiring intentions for 2011 to a 1.2 percent gain from 2 percent in the previous
survey, while boosting estimates for capital-spending growth to 12 percent from
8.9 percent.
eUnprecedentedf Gap
Even though employment tends to lag behind investment early in
recoveries, BofAfs Dutta said the current gap is gunprecedentedh 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 gunintended consequencesh of policy changes
indicate the government may gundercut its own principal aim of job creation,h he
said.
While the tax bill President Barack Obama signed Dec. 17 allows
businesses to write off 100 percent of some purchases in 2011, therefs no
similar incentive to speed up hiring. The Fedfs commitment to keep its benchmark
interest rate near zero for an extended period also facilitates lower-cost
financing for machines.
The administrationfs goal to double overseas sales of
American-made goods is another plus for investment over hiring, Dutta said,
since the U.S. export sector is capital intensive rather than labor
intensive.
eDoing Finef
gThe policy environment is incentivizing firms to limit job
creation,h he said. gThe government doesnft need to stimulate capex, which is
doing fine on its own, compared with sectors that are impaired, like the labor
market.h
Dutta predicts consumer spending will rise between 2 percent and
2.5 percent this year, below the average 3.5 percent gain in the decade leading
up to the recession.
Many employers are waiting to see how changes in health- care
will affect them, said Joe Trauger, vice president of human-resources policy at
the National Association of Manufacturers in Washington. These and other
regulations are gpitfalls that businesses could unknowingly fall into,h and the
uncertainty gcreates difficulty for hiring,h he said.
Even so, rising sales are causing companies to rebuild
inventories after slashing them by a record amount during the recession, which
ended June 2009. Therefs plenty of room to expand: Machinery and software assets
are growing at the slowest pace since World War II, and capital expenses as a
share of GDP still are below pre-slump levels.
Beating Estimates
The focus on equipment and software purchases is benefiting
Micron Technology Inc., the largest U.S. maker of computer- memory chips, whose
second-quarter sales and profit beat analystsf estimates.
gThe demand signals from the majority of our customers are
improving,h Steve Appleton, the Boise, Idaho-based companyfs chief executive
officer, said on a March 23 conference call.
Freeport-McMoRan Copper & Gold Inc., the worldfs largest
publicly traded copper producer, will boost investment to $2.5 billion this
year, a 79 percent surge from $1.4 billion last year, as it restocks after
cutbacks in the last half of 2008 and through at least half of 2009 that
included gcannibalizing equipment,h Chief Executive Officer Richard Adkerson
said on a Jan. 20 conference call.
Meanwhile, the Phoenix, Arizona-based company will add 1,200
workers in the U.S. this year to ramp up mining at three locations -- a 12
percent gain in North American staff from 9,700 at the end of 2010.
gIn terms of priority, itfs capex, capex, capex, capex,h
Adkerson said in response to an analystfs question about how Freeport-McMoRan
will use its cash.
--With assistance from Ilan Kolet in Ottawa and Alexandre Tanzi in
Washington. Editors: Melinda Grenier, Daniel Moss
To contact the reporter on this story: Sho Chandra in Washington at
schandra1@bloomberg.net
To contact the editor responsible for this story: Chris Wellisz at
cwellisz@bloomberg.net