The Healthy Numbers On Capital Spending May Be Deceiving

A sharp increase in capital-equipment spending--16% over the past year--has been one of this recovery's brightest spots. But the capital stock may not be growing as quickly as the large spending gain suggests. Computers now account for 25% of capital-equipment purchases, up from 5% a decade ago. And computers have to be replaced much sooner than most other equipment, such as machine tools, because new technology makes them obsolete faster. Federal Reserve Board Chairman Alan Greenspan notes that the average life expectancy of capital equipment was 14.5 years in 1992, down from 16.5 years in 1982 and 17.4 years in 1972. He attributes the change to computer-related equipment, which normally lasts no more than eight years, only one-half to one-third the life span of machine tools.

Business regards its spending on computers as an investment in productivity. But Fed analysts worry that the calculations of business planners may not take fully into account the speed of obsolescence of computers, which raises their long-term costs because they have to be replaced sooner than planned for. That raises the distressing possibility that replacing lower-tech but more durable equipment with the latest high-tech wonders won't improve the bottom line as much as companies think.