American businesses are ramping up technology investment and other capital spending as they emerge from the pandemic. If sustained, that investment boom could boost productivity and living standards and counteract inflation pressure.
Private non-residential business investment grew 7.4% in 2021 from the previous year after adjusting for inflation, the fastest pace since 2012 and a strong bounceback from the 5.3% decline in 2020.
Spending for software and information-processing equipment such as computers rose 14% in 2021 from the previous year. Since the first quarter of 2020, when Covid-19 began spreading rapidly in the U.S., those categories have grown vastly more than others, such as buildings, for which there is less need as work is increasingly done remotely.
Business spending will likely stay strong this year. Manufacturing firms surveyed by the Institute for Supply Management plan to raise capital expenditures by 7.7% in nominal terms in 2022. Service firms expect a 10.3% increase.
A more productive economy can produce more goods and services with the same number of hours worked. Over time that could raise workers’ wages without pushing up inflation.
Robert Rosener, a senior economist at Morgan Stanley, said the uptick in capital spending “is one area that stands out as a significant bright spot for economic growth in the longer term.”
In particular, new technology spending could occur in non-tech sectors, such as retail trade, spreading productivity gains more widely, he said. About three-quarters of retail executives surveyed by Morgan Stanley last year said they intend to increase spending on information technology, up from 21% in 2019.
One driver of the push toward technology is a labor shortage that has executives struggling to recruit and retain employees. In December 2021 the U.S. labor force was about 1.4% smaller than in February 2020, before the pandemic became widespread in the U.S. Economic output, on the other hand, was 4.5% higher in the fourth quarter of last year than in the first quarter of 2020, after adjusting for inflation.
Walmart Inc., the country’s largest employer, announced last year it would bring robots to 25 of its 42 regional distribution centers at a time when retailers nationwide have had trouble staffing warehouses. The company separately said last year it was looking to hire 20,000 permanent workers for its supply-chain operations and has boosted pay and bonuses.
Another driver is the move to remote work for legions of white-collar workers whose offices were shut down at the height of the pandemic. Firms have invested in online tools and software to allow their employees to work from home.
DocuSign Inc., which makes e-signature software saw a “dramatic acceleration of purchases” early in the pandemic, said CEO Daniel Springer, in a March 10 earnings call. The company’s revenue grew 45% in its latest fiscal year, he said. “As the pandemic subsides and people begin to return to the office, they are not returning to paper,” he said. “E-signature is here to stay.”
Research by Jose Maria Barrero of the Instituto Tecnologico Autonomo de Mexico, Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago has found that many workers will continue working from home once the pandemic is over. About 20% of workdays will be at home post-pandemic versus 5% before the pandemic, they estimate.
That will boost productivity by about 1% using the Labor Department’s measure, they estimate. At-home workers are more productive, they found, in part because they are spared office distractions.
Still, it is hard to predict how the rise in capital expenditures and remote work will affect productivity in the long run. Even in normal times, productivity is difficult to capture accurately. Pandemic-related disruptions, such as mass layoffs and rapid hiring in a relatively short amount of time, might have muddied the statistics further.
“My best guess is it’s probably a small positive,” said Mr. Bloom.
Robert Gordon, a Northwestern University economist, sees reasons to be both optimistic and pessimistic about future productivity growth. On the one hand, the increase in business spending suggests “more automation and productivity-enhancing replacement of workers by machines,” he said in an email – On the other, Mr. Gordon’s research suggests that much of the recent rise in productivity comes from industries such as finance or professional services, where a significant number of employees have been working remotely.
“To the extent that this shift from office to at-home work is temporary, so is the productivity-growth revival,” he said.