Markets and Economy
Capital Spending Outlook Takes Shape
Businesses are gearing up to increase spending on capital investments over the coming year.
Key Points:
- Business leaders say they’re optimistic and gearing up for growth.
- GDP recovered its pandemic losses, but the labor market remains 8-10 million jobs shy of full employment. This implies room for growth—and also an obstacle to get there.
- Businesses are planning capital expenditures to meet the coming demand, with a focus on digital and productivity-enhancing technologies.
- Capital spending could be influenced by workers moving from costly coastal cities and the recovering energy and aerospace sectors.
Optimism Primes Capital Spending
As the economy regains its footing, business leaders feel optimistic and eye ambitious growth plans. That came through loud and clear in our latest Business Leaders Outlook Pulse survey of 1,300 executives. It points to a more robust outlook for business capital spending.
- Three in four executives are optimistic about the national economy’s trajectory, and a record-high 82% are optimistic about their own businesses’ growth potential.
- Expectations for demand are strong: 86% of executives anticipate higher revenues in the second half of 2021.
- To accommodate future demand, a full 90% of executives plan to either maintain or increase their spending on capital investments over the coming year.
Preparing for a New Normal
The economy’s underlying potential may have grown, with businesses bracing for strong consumer demand, even as workforce growth slows as a result of worker scarcity. But future capacity needs are still uncertain.
- GDP has recovered its pre-pandemic high—but that doesn’t mean the economy is back to full capacity.
- Businesses could hire another 8-10 million workers before the labor market reaches full employment. This means GDP could continue climbing at an above-trend pace for some time.
- There’s a catch: At some point, demographic realities influencing the labor shortage will curb job growth. Baby Boomers are retiring almost as fast as Generation Z enters the workforce.
- Investments in automation and artificial intelligence technologies can help businesses increase production without adding workers and labor costs.
Investing to Address Labor Challenges
Capital expenditures are already shifting from equipment and structures toward technologies that enhance productivity and automation. That speaks to how businesses are managing labor challenges.
- Outlays for intellectual property, including software, are rivaling expenditures on new production equipment like robotics.
- Businesses may be hesitant to increase their physical plant space due to uncertainty about their ability to staff added workstations in the future.
- Productivity-enhancing software and new digital channels, however, can help a smaller workforce maintain higher levels of output.
- As skilled workers grow scarce, the benefits from these investments may spread widely, causing wages to climb.
Regional Growth Drives Investment
Capital spending trends also reflect the nation’s internal migrations. For many Americans, the pandemic accelerated a shift toward remote work and ushered in a new age of geographic mobility.
- No longer tethered to costly coastal cities, workers are moving inland. Utah, Texas and Colorado topped the nation in relative population growth last year.
- This migration is generating a boom in capital investment. Homes and infrastructure must be built to accommodate the growing population in these areas.
- Commercial real estate construction also follows population trends. New residents may be working remotely, but they still shop and eat locally.
Energy and Aviation Rebound
Energy projects and aerospace manufacturing are also uplifting capital investment numbers as a percentage of GDP. And what is true for these sectors is also true for the many ancillary businesses they touch.
- Energy exploration has doubled from last year’s low, and current prices could support another doubling of drilling activity in the near term—pointing to an expansion in structures.
- Energy investment reaches far beyond fossil fuels. The growing market share of electric vehicles and heat pumps will likely generate sustained demand for new renewable energy sources.
- Meanwhile, passengers are returning to the skies, prompting demand from airlines for updated fleets. Purchases of new aircraft may continue to be a leading driver of capital investment in equipment.
What to Watch
The mix of capital investment spending can reveal how businesses are thinking about the future. Look for spending on intellectual property to grow more quickly than outlays for new structures and equipment. This will be a sign that productivity-enhancing software is playing a central role in expanding production.
Jim Glassman, Head Economist, Commercial Banking

Jim Glassman, Head Economist, Commercial Banking
Jim Glassman is the Managing Director and Head Economist for Commercial Banking. From regulations and technology to globalization and consumer habits, Jim's insights are used by companies and industries to help them better understand the changing economy and its impact on their businesses.
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