Congratulations! Your Capital Stock Is Up

America's "tools of production" have been soaring lately

What makes a country rich? Not the amount of money in its bank accounts and stock markets. Rather, the true nature of a nation's wealth is its accumulation of the tools of production, such as computers, machinery, and vehicles, combined with the skills and education of its population. The larger the "capital stock" a country has, the more productive its workers can be. One person running sophisticated computerized machinery, for example, can turn out far more parts, and at far less cost, than a worker equipped with only hand tools.

On May 14, the Bureau of Economic Analysis published an overhauled set of capital stock numbers for the U.S., based on new methods for figuring depreciation, the rate at which capital investments deteriorate. The new figures show that the stock of buildings and equipment--a total comprising business equipment and buildings, government capital such as missiles and schools, and consumer durables such as autos and computers--was $22.6 trillion in 1995, about 20% higher than previous estimates.

SURGE. More important, the new data show that the net value of nonresidential equipment owned by business soared by 4.7% in 1995, the largest gain since 1979 (chart). By BUSINESS WEEK's calculations, the increase in 1996 was around 4.8%. And despite the continued number of new hires, the amount of equipment per private-sector worker rose by 2.5% in 1996, following a 1.6% gain in 1995. By contrast, from 1984 to 1994 equipment per worker only increased at 0.8% per year.

The recent surge in the capital stock helps explain why productivity in the nonfinancial business sector is rising at a 2.4% rate, double the previous decade. Moreover, the pattern of investment shown in the new numbers suggests that productivity gains are still being undermeasured.

Consider financial services. Insurance companies and banks account for almost 20% of all net business investment since 1992, according to the new numbers. The amount of buildings and equipment per worker in the insurance industry, for example, rose by more than 28% between 1992 and 1995, while banking showed an increase of 18%. Yet banking and insurance make little or no contribution to the official productivity statistics, since government statisticians have no good way to measure the output of these industries.

To be sure, these outsize gains are deceptively large because financial institutions may invest in tangible assets such as airplanes that they then lease or rent to others. Nevertheless, financial-services companies have been spending at a furious rate, investing in new computers and sophisticated information systems to remain competitive. For example, Chicago-based CNA Financial Corp. has been putting money into such areas as insurance claims automation. As a result, CNA's purchases of property and equipment totaled more than $200 million in 1996, up from only $32 million in 1992.

SURPRISE. Or take the communications industry, which is spearheading the Information Revolution. Telecom companies accounted for 11% of the increase in business capital stock between 1992 and 1995. But new communications services such as cellular telephone, the Internet, and satellite TV are measured poorly in the government data.


One of the more surprising contributors to the U.S. capital stock has been the wholesale trade industry. As wholesalers take on a lot of responsibility for managing the flows of goods between manufacturers and retailers, the capital stock has risen by 15% since 1992. W.W. Grainger Inc., a $3.5 billion distributor of maintenance and repair supplies, spent almost $300 million over the past 3 years, building new distribution facilities and improving computer systems to get products to customers more quickly. "We completely replaced our inventory control and processing systems in 1994 and 1995," says Donald Bielinski, senior vice-president of marketing and sales.

So far in 1997, capital spending by business is running at a pace almost 10% over a year earlier. As long as that continues, the country's capital stock will keep growing, and it's a good bet that the economy--and Americans--will prosper.