Fisher Investments Editorial Staff
Others

Employment on Capital Spending’s Heels

By, 08/13/2010
Story Highlights
  • Many investors fret the global economy is slowing and may sink back into recession. 
  •  Capital spending is historically a good predictor of rising employment.
  • With corporate liquidity at an all time high, capital spending should continue to rise—which is bullish for stocks and the economy at large.
  • High unemployment doesn't preclude an economy from growing or firms from increasing earnings, which should translate into higher stock prices. 

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Thursday was another glum day for stocks. Dour headlines, economic data hiccups, and doubt are recurring themes recently. While down days are never fun, investors must remember stocks never move in a straight line up.

Continuing on themes from earlier this week, investors worldwide are fretting the global economy is slowing and may sink back into recession. As evidence, investors and pundits alike point to poor employment news. We've shown here repeatedly unemployment is high, and has remained high, but that's quite normal following a recession. Why? The economy leads job creation—sometimes greatly—not the other way around. (See our past writings on unemployment for more in-depth analysis on why.)

But here's a ray of sunshine to illuminate otherwise dreary data: US firms are sitting on a $1.8 trillion mountain of cash. With corporate liquidity at an all-time high, capital spending should continue to rise—which is bullish for stocks and the economy at large. That's not all—it's good news for jobseekers too. Historically, there's a strong relationship between capital spending on equipment and software and nonfarm payrolls. As firms gain confidence in recovery, they tend to spend money on long-delayed upgrades and eventually begin hiring again. The two measures do not move in lockstep, but as spending increases, hiring faithfully follows some time later. And recently, capital spending has been rising sharply. In the biggest second quarter jump since 1998, US firms increased spending on equipment and software at an annualized rate of 21.9%. History shows increased hiring likely isn't far behind.

When exactly will employment follow? It's hard to know and different every time. But firms can only stretch existing headcount so far before feeling the pressure of falling productivity. Ultimately, high unemployment is a symptom, not a cause of recession, and should improve as the economy continues to heal.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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