Companies are choosing to spend on equipment instead of labor

There’s been a lot of evidence in recent months that businesses have been pouring money into new equipment. Spending on durable goods has been strong, and so has demand for business loans to finance new equipment.

At the same time, businesses have not been spending as much on new employees. That’s because for many businesses, new equipment can help them become more efficient at a time when the economy is uncertain and available labor is hard to find.

Over the last few months, a mountain bike company based in Colorado called Revel Bikes has been buying new molds for making carbon-fiber bike frames.

“It’s a big chunk of steel with our specific design that we can then put material in, and turn that into a bike frame,” said Adam Miller, Revel Bikes’ owner.

Miller said the molds cost upwards of $120,000 each. They’re worth it, he said, because sales have been strong.

“Year to date, our sales are about three times higher than what we had originally planned on, which is phenomenal news,” Miller said. “But that also means we need to invest more money into buying more frame molds in order to keep up with that production.”

The company also just moved into a new headquarters closer to Denver, which will save the company money on shipping. That’s the kind of efficiency Miller wants from every investment that Revel Bikes makes.

“We’re not buying a fancy new conference table for our new headquarters, but we are investing heavily on the latest and greatest inventory control software so that we can make sure we can build bikes efficiently, and get them out the door efficiently,” Miller said.

Miller said he’s focused on efficiency in large part because the economy’s so uncertain. 

Oren Klachkin, an economist with Nationwide, said because of that uncertainty, a lot of companies are choosing to spend more on new equipment instead of hiring new employees.

“With a piece of equipment, you know what you’re going to get,” Klachkin said. “When you hire someone, you have to onboard that person, get them working into the existing structure. There’s obviously always a bit of uncertainty.”

Plenty of businesses do want to hire. But many of them are having trouble.

“We still continuously hear from the businesses we talk to that one of the toughest challenges that they face is finding skilled labor,” said Shannon Grein, an economist with Wells Fargo.

Grein said that’s partly because the workforce is aging, and because the Trump Administration has been cracking down on immigration. Either way, the tight labor market is motivating businesses to spend more on equipment and other capital expenditures.

“In some ways, we actually need CapEx, and maybe even artificial intelligence, to offset some of the shortages in labor that we’re likely to experience over the next number of years,” Grein said.

At Revel Bikes in Colorado, Miller said some of the investments he’s made have already allowed him to cut labor costs. For instance, a few years ago, the company needed four people to plan purchasing, shipping, and logistics.

“Today, we have one person in that same job, because we’ve invested in new software and systems that can do a lot of that better, and more efficiently,” Miller said.

Miller said decisions like that are meant to ensure that the company sticks around for the long-run, whatever the economy ends up doing.