The Upjohn Institute Blog

Business Expenditures, Employment, and the Great Recession

Posted: March 18, 2011

By Brad Watts

New data from the U.S. Census Bureaus annual capital expenditures survey highlight another frequently overlooked casualty of the 2007-2009 national recession: business expenditures.  Although the U.S. economy is dominated by consumer spending on goods and services, the nations private businesses also stimulate demand through purchases of capital equipment and investments in buildings.  Data on business expenditures can also shed some light on how different industries react to changes in the business cycle, and whether they show a preference for human capital or physical capital when making decisions on where to cut back during a downturn or where to invest during an expansion.

The sectors that pulled back the most come as no big surprise; the largest reductions occurred in industries that also experienced major layoffs and closures during the recession. For example, construction firm expenditures fell by more than half from 2008 to 2009, and businesses in manufacturing, finance, real estate, transportation and warehousing, and accommodations and food service all reduced their expenditures by more than one-fourth.

In short, most sectors of the economy pulled back in every aspect of business activity during the recession.  However, in some industrial sectors the expenditure changes that occurred did not coincide with the direction or magnitude of employment change.  For example, from 2008 to 2009:

• Expenditures in the health care industry fell by 12.1 percent, while national employment in the sector actually rose by 1.9 percent.
  
• Expenditures in the management of companies and enterprises sectorwhich essentially consists of corporate headquartersactually increased by 13.3 percent, while at the same time employment in the sector shrank by 2.0 percent. 
• Expenditures by administrative and support firms were unchanged, while employment dropped by 10.7 percent.

The differences between expenditures and employment trends can be indicative of sectors where workers are either safer from, or more exposed to, fluctuations in the economic cycle. So for example, in the health care sector it appears that workers are safer from layoffs during economic downturns, while those working in positions tied to management of businesses and enterprisesi.e. middle management and other positions at corporate headquartersmay be more exposed.

Of course, the exact reasons behind these differences in expenditure and employment trends are complex since every industry (and even every firm within these industries) operates using a slightly different mix of workers and equipment in the production of their goods or services.  Perhaps medical offices find it easier to share old equipment than to push doctors and nurses for more work, while business management operations found new equipment or technology to be a cost-effective replacement for some types of workers.  Whatever the cause, it is clear that not every industry simply cuts back on both employees and equipment purchases at identical rates when the economy turns sour.  It also raises the question of how these industries may differ in behavior now that the national economy has entered a recovery phase.

Brad Watts can be reached at Watts@upjohn.org.

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