Fed Stimulus Blunted as Software Replaces Hard Assets



Mike Nobis saw how the financial crisis led his customers to postpone orders until the last minute, forcing his 100-year-old family printing business to work faster to deliver on time.

Instead of adding more people or machinery, he found the solution to the new business demands in a piece of software.

"We are investing a whole lot more in the software we are using so we can use less and less employees to do the exact same work," said Nobis, president of JK Creative Printers & Mailing, of Quincy, Illinois, which produces items from business cards to catalogues.

Nobis's strategy is being replicated at companies around the U.S., where investment in software is up 19 percent since the 2007 business-cycle peak, while spending on hard assets has slumped. Executives are taking less risk on physical assets such as computer hardware, machinery or warehouses, and using software to increase efficiency or reach customers on the Internet.

That shift has implications for the Federal Reserve. It suggests business spending may be less responsive to interest-rate policies, such as quantitative easing, aimed at encouraging investment in long-lived assets like structures, housing and equipment. Software purchases are typically financed out of cash on a month-to-month subscription basis, making the cost of borrowing less likely to influence the decision.

Monetary Policy

"Monetary policy is driven by the feeling that if you lower interest rates businesses will invest," said Joe Kennedy, a senior fellow at the Information Technology and Innovation Foundation, a Washington research group. "There is an assumption that it will be on big, long-lasting projects."

Given the cloudy economic outlook, still-high unemployment rates, and lack of policy consensus in Washington, "businesses are trying to avoid long-term bets on fixed assets," he said.

Investment in non-residential structures such as stores and warehouses is down 18 percent since the fourth quarter of 2007, which marked the start of the recession. Spending on equipment of all kinds, from computer hardware to machinery, is up just 2.2 percent, according to data from the Bureau of Economic Analysis.

Corporate America's focus on labor-saving, low-risk investment is turning into "a big worry" for the economy, said Julia Coronado, chief economist for North America at BNP Paribas in New York. "This technology is labor-saving capital investment; it doesn't come with jobs. It doesn't add capacity; it makes existing capacity more efficient."

Yellen's Challenge

That will be one of the challenges confronting Janet Yellen, the nominee to succeed Fed Chairman Ben S. Bernanke when his term ends Jan. 31. Yellen, the current Fed vice chairman, is awaiting a Senate confirmation vote.

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