Can Continuing Employment Growth Boost Business Spending?

January 30, 2014 | Mike Spychalski, CAIA, Vice President

This week’s chart of the week compares business spending (represented by non-defense capital goods orders) to employment (represented by total nonfarm employees) in the United States. As the chart illustrates, both employment and business spending have been steadily rising since the economic recovery began back in 2009. However, the growth of business spending, which contributed significantly to economic growth in the early stages of the recovery (increasing by an average of approximately $640 million per month from May 2009 through December 2011) has slowed as of late (increasing by an average of approximately $34 million per month from January 2012 through December 2013).

Employment growth, on the other hand, has been fairly steady over the past several years (increasing by an average of approximately 180,000 jobs per month each of the past three calendar years). With the ongoing strength in employment growth, the United States is approaching a new all-time high in total employment (i.e., peak employment). At the current rate of employment growth, the United States should reach a new peak employment this summer. This is a significant development because reaching new peak employment has historically led to significant growth in business spending, as businesses have to purchase new technology, equipment, and space to accommodate a larger workforce.

It will be important to monitor how businesses react once the economy reaches new peak employment. If business spending increases as it has in the past, it will provide another tailwind to an already strengthening economic recovery.