Delta’s computer nightmare reveals the biggest problem in corporate America – Business Insider

It’s been a bad week for Delta.

A computer
outage at the company’s Atlanta headquarters
on Monday caused
the cancellation of 1,800 flights over two days. Then 250 more
flights were canceled Wednesday as severe weather threatened
flights along the east coast.

Bloomberg’s
Michael Sasso and Thomas Black reported Tuesday
that the
computer failure could dent Delta’s third-quarter earnings by as
much as 10%. Sasso and Black also said the problem served as a
wake-up call for the airline industry and for airlines’ outdated
computer systems.

But this issue goes much broader than the airline industry:
Capital investment is a problem for all of corporate
America.

The
most recent report on US gross domestic product
showed that
real private nonresidential fixed investment — a fancy way of
saying capital expenditures — fell at an annualized rate of 1.3%
in the second quarter.

This served as a drag on the overall number, which showed that
the economy grew at a rate of just 1.2% in the second quarter

amid one of the strongest quarters for consumer spending

since the financial crisis.

A look into business investment trends makes clear that corporate
America is dropping the ball on things like, in the case of
Delta, upgrading outdated computer systems that can cause massive
delays.

Neil Dutta, an economist at Renaissance Macro, noted last month
that investment in equipment and structures fell during the
second quarter while research-and-development spending rose at an
annualized rate of 4.8%. R&D spending accounted for 1.8% of
GDP, a record.

And so there is clearly some appetite for spending from
US businesses; it is just that this spending is not addressing
the problem of existing structures, equipment, and technologies
that need upgrading.

Businesses appear enthusiastic about investing in the
future, but it is the present that needs
attention. This is analogous to how
American infrastructure fell behind the developed world
: It
is just not sexy to spend billions fixing old rivets on bridges.

This failure of dated computer systems also puts further pressure
on the scourge of economists the world over: productivity.

Time spent in an airport or on a grounded plane is time that US
workers are not able to be productive. When you read things like
US
highway congestion costs $160 billion a year
,” this is what
it means. Wasted time.

On Tuesday we learned that nonfarm productivity in the US fell
0.5%, the third straight quarter worker in which output has
fallen.

And since Robert Gordon’s zeitgeist-defining “The
Rise and Fall of American Growth
” — which argues that US
productivity will simply be lower going forward because
innovations like running water, microwave ovens, and air
transportation (among thousands of other advances that raise the
standard of living) can happen only once — worries about a future
of low US productivity, and thus a slower increase in the
standard of living, abound.

In a note to clients on Wednesday, Dutta argued that running the
economy hot, when workers become scarce and increased
efficiencies are required to maintain growth, is one way to goose
productivity.

This chart from Dutta outlines how a lack of quality labor has
often been followed by an increase in productivity.


Screen Shot 2016 08 10 at 11.37.01 AMRenaissance Macro

Another way to increase productivity, as Dutta highlighted along
with the July 29 GDP release, is to increase capital spending.
R&D numbers already portend a future of increased
productivity.

More computer problems like what we saw from Delta earlier this
week could encourage businesses to fill in the missing piece of
their capital-spending puzzle.

And with this could come the next leg of US economic growth.

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