Hand Over Fist Capital SpendingKevin Kelly
When is Corporate America going to start investing in its aging equipment base? Consider the spending plans of such large U.S. companies as Ford, Burlington Northern, Motorola, Pacific Bell
and Intel. They are dramatically jacking up outlays for machinery and equipment.
Across the U.S., there's a veritable capital-spending boom going on. On Jan. 28, the Commerce Dept. announced that capital outlays soared 21% in the fourth quarter of 1993 and grew 14.7% for the entire year. The spree helped push gross domestic product up an astounding 5.9% during the December quarter and 2.8% for the year. Better yet, CS First Boston Inc. economist Rosanne M. Cahn figures that capital spending could advance an additional 15.5% this year.
Why the surge? The nation's capital stock is the oldest it has been since 1945. And low interest rates continue to entice companies into replacing aging machines. On top of that, a continued inability to raise prices, says 3M economist John McDevitt, is forcing companies to boost productivity and cut labor costs--which means replacing people with machines. With factory-utilization rates hitting 83% at the end of 1993, companies have little choice but to shell out to meet growing demand. Says economist Laurence Meyer of Laurence Meyer & Associates: "There is enormous momentum in capital spending."
You can say that again. Spending on computers, electronics, and office equipment is growing by leaps and bounds. Machine-tool orders climbed to $803 million in the fourth quarter, up 40% from the prior year, in part from orders by carmakers ramping up to meet increased demand. And double-digit growth in furniture sales is fueling investment in that industry. Pulaski Furniture Corp., a Pulaski (Va.) manufacturer with sales of $140 million in 1993, poured $10 million into a new computerized manufacturing facility, set to open in April. Chief Executive Bernard Wampler says the plant will use 35% less labor and boost sales $40 million by 1995.
LABOR LOSS. Pulaski illustrates the near-term downside of capital spending. Productivity soars (chart)--but hiring these days rarely follows in the numbers it once did. Many companies are desperately attempting to avoid rising wage and health-care costs. Heavy-duty truck manufacturer Freightliner Corp., for instance, faced with a hot market, plans to boost spending on machinery by 20% this year to increase productivity. "We want to do everything to increase productivity without increasing people or plants," says CEO James L. Hebe. Ads Cahn: "Labor is simply more expensive than capital right now."
Capital spending isn't killing all job growth, though. Truck-trailer manufacturer Wabash National Corp. plans to push outlays for equipment to $10 million this year, up 66% over 1993. It also plans to hire dozens of factory hands to run those machines. U.S. Robotics Inc., a Skokie (Ill.) data-communications-equipment maker, has already signed on 300 employees this year, after hiring 460 last year. And Louisville (Colo.) computer-storage-device maker Storage Technology Corp. plans to hike employment 10% this year, adding 1,000 jobs.
Indeed, spending by high-tech companies--much of it for the long-awaited Information Superhighway--is doing a lot to fuel the boom. Just consider Pacific Bell. The San Francisco-based regional phone company recently announced plans to spend $16 billion over the next seven years on a powerful system to allow homes and businesses to process voice, data, and video communications. Heavy investments in fiber optics, coaxial cable, and digital switches will drive up outlays close to 30% annually.
PacTel isn't the only telecom outfit suddenly spending big, either. Rivals MCI, Bell Atlantic, and American Telephone & Telegraph have unveiled plans to construct their own contributions to the burgeoning Superhighway. MCI Communications Corp., for instance, recently announced it would shell out $20 billion by the year 2000.
The advance of technology is also driving up investment by chipmakers. Intel Corp., for one, will boost capital outlays 26% this year, to $2.4 billion. Much of that money will go toward jacking up production of its new Pentium microprocessor, the chip that will power the next generation of personal computers. Intel added 3,000 jobs in 1993 alone, with more to follow. Rivals Advanced Micro Devices Inc. and Texas Instruments Inc. also are investing heavily. AMD will spend $512 million this year, up 36% from 1992, partly to complete a new chipmaking facility in Austin, Tex.
Technology shifts are transforming Rust Belt industries, too. Steelmakers are pouring money into nimble minimills to meet demand for the flat-rolled steel used to make cars and appliances. Industry leader Nucor Corp. will invest $70 million to double capacity at its two flat-rolled plants. "Low interest rates and the economy have contributed to our activity," says Nucor Chairman F. Kenneth Iverson. Among railroads, Burlington Northern Railroad Co. and CSX Corp. are spending heavily on next-generation locomotives that pull more weight and have fewer moving parts than current models.
There's a lighter side to the boom, too. Boatmaker Brunswick Corp. plans to boost spending on machinery by about 10% this year to meet growing demand for its pleasure craft. And gambling companies in Las Vegas continue to spend lavishly to outfit new casinos with the latest whiz-bang high-tech special effects. Add that to all the other new spending that's going on right now, and the kind of money is being laid down that even a Vegas high roller could appreciate.