It is said that generals always prepare for the last war. Old tactics and strategies get reused in the hope of reliving glories past. But, of course, the next war is different. And those blind to the changes are doomed to defeat.
The same could be said of the captains of industry: During the Great Recession, corporate executives, burned by the tech spending boom of the 1990s and frightened by the financial crisis of 2008, unleashed the heavy artillery on their own expense lines.
The result was one of the deepest and most prolific cost-cutting campaigns ever. Far more jobs were cut than the decline in economic output justified. And capital investment fell by more than twice the historical average given the depth of the recession.
In fact, CEOs have underinvested to such an extent that over the past year the manufacturing capacity of the United States has been shrinking at a record pace, hampering the economy's ability to recover and expand.
Widespread problem
I'm not talking about steel mills and factories abandoned years ago. The decline is happening across a wide swath of today's economy. The worst damage is being suffered by the makers of cars, clothes, furniture, and wood and paper products. As Neil Young sings, "Rust Never Sleeps."Now that the economy is coming back to life, many major industrial companies are finding it increasingly difficult to secure parts from suppliers. Caterpillar (CAT, news, msgs) and Boeing (BA, news, msgs) recently complained that suppliers haven't been able to meet the groundswell of new orders. The problem is especially acute in the technology space. Altera (ALTR, news, msgs), a maker of semiconductors, said its lead time on orders had increased from 16 weeks to 26 weeks.
The good news: Things are starting to change. As I discussed in a recent column, CEOs have become much more optimistic over the past few months, with the gap between consumer and CEO confidence reaching record levels. (Read "Why are CEOs so cocky these days?")
As a result, businesses are spending on new equipment at the fastest rate since 1995. According to Merrill Lynch economists, most of these investments are replacement purchases, equipment bought to replace what's broken or outdated. This has helped stop the bleeding: June marked the first month in two years in which the country's manufacturing base didn't shrink on a month-over-month basis.
And history shows that when businesses splurge on capital expenditures, or capex, new jobs tend to follow. That's just the thing to kick-start a drop in the stubborn unemployment rate, spur consumer spending and send stocks skyward.