<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=192888919167017&amp;ev=PageView&amp;noscript=1">
Monday, March 18, 2024
March 18, 2024

Linkedin Pinterest

U.S. spending on innovation surges

Research, development priorities for companies

The Columbian
Published:

WASHINGTON — U.S. companies are again putting money where their competitive advantage lies: in uncovering the products that will one day change how you work and play.

Corporate spending on research and development rose 6.7 percent in 2014, almost twice the previous year’s gain and the biggest advance since 1996, according to Commerce Department data. The pickup was capped by a 14 percent fourth-quarter surge that signals additional increases on the way.

The spending could extend the momentum of an era of growth- inducing innovation that produced smartphones and tablet computers, 3-D printers, cloud software that delivers services via the Internet and hydraulic fracturing that is making the U.S. more energy self-sufficient. Combined with what’s still on the drawing board, such initiatives raise the odds productivity will rebound, boosting the standard of living.

“CEOs wouldn’t be paying all these researchers — which is where the R&D budget primarily flows to — unless they thought that there was something really interesting going on,” Jason Cummins, chief U.S. economist and head of research in Washington for hedge fund Brevan Howard Inc. “R&D surges like this sow the portents of better productivity growth three, five, 10 years later.”

The United States could benefit from such a boost. Employee output per hour has climbed 0.7 percent a year on average since 2011, compared with gains of 2.5 percent from 1990 through 2005, a period encompassing what some economists have called a “productivity miracle.”

Productivity measures the overall efficiency of the economy and governs how fast it can expand, how much companies can earn and pay their workers, and how much the government can increase its budget.

More research may help rekindle business investment in equipment that has been bogged down since late 2014. Orders for non-military capital goods excluding aircraft, a proxy for future spending on new gear, slumped 1.4 percent in February, Commerce Department data showed Wednesday. It marked the sixth straight decrease, the longest stretch since mid-2012.

The pickup in R&D spending last year was paced by well- known names, as 18 companies in the Standard & Poor’s 500 Index boosted such investment by 25 percent or more from 2013, according to data compiled by Bloomberg. The list includes drug- makers such as Pfizer, travel-booking firms Priceline Group and TripAdvisor, and Apple and Google.

Pharmaceutical companies were some of the biggest spenders on R&D in 2012, running up a $48.1 billion tab, according to the latest data from a survey by the National Science Foundation. The information industry — including publishing, telecommunications and data processing — shelled out $46.8 billion, while transportation-equipment makers spent about $42.3 billion.

Caterpillar, the world’s biggest maker of construction machinery, plans to boost R&D spending in 2015 for a third year even as sales probably will decline, Richard Moore, director of investor relations, said at a March 3 industrial conference.

“To remain the leader in the industry, there are some things we need to invest in and make progress on,” Moore said. Such spending will rise about 10 percent from 2014 levels, almost to the $2.5 billion that marked the Peoria, Ill.-based company’s peak in 2012, even as business slips by about 9 percent, he said.

Investors are now rewarding companies looking to the future rather than those using their horde of cash to buy back shares, said Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch in New York.

Shares of the 190 companies in the S&P 500 that disclosed R&D spending in 2014 outperformed the overall index by 6.1 percentage points, according to Factset data compiled by Bank of America Merrill Lynch analysts.

“Companies are starting to feel maybe a wee bit better about the future, so they are unleashing the purse strings,” said Subramanian. “We hadn’t seen company spending on much of anything until 2014.”

Part of that investment is going toward hiring staff with the skills needed to develop new products, which is contributing to the general improvement in the job market.

Employment at testing laboratories climbed by 4.8 percent in the 12 months ended in January. That’s twice the 2.4 increase in total payrolls over the same period, according to Labor Department figures. Hiring of research and development staff at science and engineering companies rose 2.1 percent in the 12 months through January, the biggest year-to-year gain since January 2009.

The U.S. is a leader in R&D spending in part because some 70 percent of venture capital money is based here, said Subramanian. This is “another good barometer of how innovation-oriented a particular region is,” and shows that America is “hyper-focused” on that investment, even if some of the venture capital money ends up in foreign companies, she said.

The benefits of increased spending on R&D also are likely to help spur sluggish wage growth, Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, wrote in a March 19 research note.

More investment in intellectual property — which includes software and entertainment in addition to R&D — should prompt acceleration in incomes in the next couple years, he wrote.

Spending on computer software, which is tallied separately from the government’s R&D category, also has shown a revival. It increased at a 10.1 percent pace in the fourth quarter, its best gain since 2011. That bodes well for productivity as work is streamlined, Sweet wrote.

Not everyone is convinced that the U.S. economy has the capability to become more efficient. Robert Gordon, a professor at Northwestern University in Evanston, Illinois, is a leading skeptic that growth has room to run via innovation.

“Diminishing returns have set in,” as the workforce shrinks because of the retirement of baby boomers, educational attainment remains low, inequality widens and federal debt balloons due to entitlement programs, Gordon wrote in a February 2014 research paper titled “The Demise of U.S. Economic Growth.”

Loretta Mester, president of the Federal Reserve Bank of Cleveland, disagrees. She said at a March 9 conference hosted by the National Association for Business Economics in Washington that she’s “not a structural-stagnation kind of person,” citing the theory which argues the economy is trapped in a prolonged period of sub-par growth.

“Productivity growth is low now, but I think it’s going to come back,” Mester said. “It’s hard for me to believe that all of the things going on in the technology realm and the biotechnology realm are not going to lead to stronger productivity and better standards of living for us.”

More research may help rekindle business investment in equipment that has been bogged down since late last year. Orders for non-military capital goods excluding aircraft slumped 1.4 percent in February, according to the Commerce Department. It marked the sixth straight decrease, the longest stretch since mid-2012.

Multinational companies aren’t the only ones looking to grow. About 26 percent of firms with fewer than 500 workers said in February that they planned to boost capital spending in the next three to six months, according to a National Federation of Independent Business survey that included 716 responses. That matched the prior month’s reading for the third-strongest since the last recession ended in December 2007.

“I don’t think all the gains from technology have been exhausted,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research in New York. “The fact that R&D spending is rising is a sign that firms are willing to take risks and all the good things have yet to be invented.”

Loading...