The complex reality of business spending

July 22, 2014
By: Tim Heston

Business spending is a complex animal, and it's difficult to sum it up in a few charts.

In a metaphorical sense, the economic world seems to be a lot like the physical world. When physicists measure large things, like stars and galaxies, they see everything playing by the rules defined by Newtonian physics and Einstein’s general relativity, where set laws predict motion with amazing accuracy. When they measure things like atoms and quarks, they need to throw those rules out the window to enter the jumpy, jittery world of quantum physics.

In economics, a lot of people tend to look at the macro-world, the statistics gleaned from the Bureau of Economic Analysis (BEA), the Bureau of Labor Statistics, along with plenty more bureaus and agencies. Stats from the BEA, for instance, now say that worker productivity is lagging, as is capital spending. Would more equipment improve worker productivity? At the general relativity level, it sure makes sense. A manufacturer buys a machine that can help a worker do more with less.

But one important fact gets missed here—at the quantum level, at the small and mid-sized contract manufacturers and job shops dotting the United States, where most of the manufacturing in this country takes places, neither the demand nor the product mix is consistent. What these shops demand is flexibility, brought about by automatic tool changes, offline programming, and the like.

These days, one machine that can automatically change tools (on a press brake, for example) can do the work of several older machines, and it’s not because it can churn out more parts per hour. It’s because it can change from one job to the next in a matter of minutes.

Thinking businesses should buy more equipment is analogous to the argument that businesses should hire more. After all, look at Wall Street—companies are flush with cash. Why aren’t they spending it?

First, most companies that make up U.S. manufacturing aren’t publically traded, and their balance sheets may not be so flush with cash. In fact, according to the 2014 edition of the Financial Ratios & Operational Benchmarking Survey, a good portion of fabricators must deal with customers who don’t pay for several months. It’s no secret that for some contract fabricators, cash flow can be a problem, depending on their customer mix.

Second, consumers are in the driver’s seat. At the general relatively level, the policymaker sees the need for businesses to hire more to increase consumer spending. But the individual business owner won’t hire for the good of consumer spending. The business owner hires for the good of customers, and if the demand isn’t there, why hire or, for that matter, buy equipment?

Besides, as manufacturers continue implementing continuous improvement, they discover the value not of additional capacity, but of flexible capacity, and they can get that with cross-trained workers and flexible machinery.

Just as the laws of general relativity don’t work well with quantum physics, large-scale thinking—the need for hiring to increase consumer spending—doesn’t agree with the needs of the small business owner. Reality is diverse, complicated, and not easily summed up in a few charts.

Tim Heston

Tim Heston

Senior Editor
FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-381-1314