Resource Use through the Business Cycle - Capital Spending

Shifts in capital spending tend to affect the overall economic cycle in three stages or phases.

In the early stage of a contraction, the initial cutbacks at this stage exaggerate the economy’s contraction. Then later, as the general cyclical downturn matures, cutbacks in spending on structures and heavy equipment further intensify the contraction.

In the early stages of an expansion, capital spending begin to increase.

The orders initially reinstated are for equipment with a high rate of obsolescence, such as software, systems, and technological hardware.

In the later stage of expansion, productive capacity may begin to limit ability to respond to demand.

The increase in capital spending to increase capacity may occur surprisingly soon after capacity utilization picks up. New orders intended to increase capacity may be an early indicator of the late stage of the expansion phase.