Manufacturing cost reductions lead businesses to invest in equipment, shun hiring new workers  The recession that struck the U.S. financial and housing markets in 2008 has - like those that came before it - fundamentally changed the way businesses operate. According to a published report, U.S. companies are increasingly focused on cost reductions, and they're achieving them by spending more on technology and less on workers.

The New York Times reports that businesses are working to increase their profit margins amid a tepid economic climate, and they are overhauling their pre-recession spend management operations to cut costs. As a result, they are investing in equipment and foregoing the hiring process, leading to a robust manufacturing sector, but a beleaguered job market.

In fact, since the recovery began U.S. businesses have increased spending on employees by two percent, but their investment on new equipment and software has skyrocketed 26 percent. This, according to the Commerce Department, is partly to blame for the more than 7 million jobs that have been lost in the wake of the most significant economic contraction since the Great Depression.

Technological advancements have helped the U.S. manufacturing sector to increase its efficiency over the past few decades, and though manufacturing activity has slowed from its rapid growth pace over the past two months according to the Institute for Supply Management (ISM), it has helped drive overall economic growth.

Dan Mishek, the managing director of Minnesota-based Vista Technologies, is representative of this new trend to invest in equipment over workers.

"I want to have as few people touching our products as possible," Mishek affirmed. "Everything should be as automated as it can be. We just can’t afford to compete with countries like China on labor costs, especially when workers are getting even more expensive."

In 2010, Vista spent $450,000 on new technology, but only hired two new employees whose combined salary and benefits amount to about $160,000 per year.

The U.S. manufacturing sector is responsible for more than $1.6 trillion of productivity each year, and is responsible for employing more than 10 percent of the nation's workers. What's more, the manufacturing sector has experienced huge gains in productivity over the past 50 years, with efficiency surging.

Still, industry analysts worry that the U.S. reliance on continued investment in technology - when it comes at the expense of jobs - could cause the job market to remain depressed for the foreseeable future.

U.S. businesses have sharply increased their capital spending during the nascent economic recovery, but their reticence to hire new workers is reminiscent of the recovery that followed the 1982 recession. Businesses, however, assert that the generous tax subsidies and falling equipment prices are leading them to invest in equipment that can fuel manufacturing cost reductions in the future.

Barclays Capital U.S. chief economist Dean Maki said that companies are just doing what makes fiscal sense: They are working to achieve business cost reductions and using federal and state incentives to do so.

"Firms are just responding to incentives," Maki asserted. "And capital has gotten much cheaper relative to labor."

This is evident in new data recently released from the Labor Department that shows equipment and software prices have dropped 2.4 percent since the recovery began, while labor costs have climbed by 6.7 percent. The uptick in costs associated with workers, though, is mostly related to soaring healthcare costs, and is not really benefiting newly hired employees.

Meanwhile, companies like Apple and Google are sitting on record piles of cash, and are reporting record profits amid sweeping cost cutting measures. Many companies that are hiring are only seeking out highly skilled workers with degrees in engineering and other specific disciplines, analysts assert.

Furthermore, while historically capital investments have led to increased hiring, this economic recovery has resulted in no such relationship. Companies are getting increasingly savvy at utilizing a complex tax code to write off many of their new equipment purchases, and they are buying devices that do not need workers to operate.

Some economists theorize that the U.S. could be undergoing a systematic shift with its labor force, much like ones that have occurred in the past. While more than 40 percent of the American work force in the early 20th century worked in the farming sector, that has plummeted because of technological advancements. Farmers found new careers to break into, and new industries emerged.

No president has ever been re-elected with an unemployment rate above 7.2 percent, and President Obama has his work cut out for him as he begins to campaign for 2012. Mishek sums up his desire to buy machines over hiring new workers, and in doing so illustrates the uphill battle the government faces as it looks to lower the unemployment rate.

"You don't have to train machines," he said. 
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