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April 16, 2021

CFOs Don’t Anticipate a Pickup in Investment: What Does This Mean for Productivity?

Article by: Brent Meyer and Sonya Ravindranath Waddell

Every six months, The CFO Survey includes questions that aim to understand how firms are investing for the future. Analyzing these questions provides important insight into the highly uncertain environment within which firms have been operating for more than a year. In the Q1:2021 survey, we learned that in aggregate, business investment plans are similar to what they were in the third quarter of 2020, although the reasons behind those plans might have changed. These survey results suggest that companies do not anticipate building a lot of new capacity in the next six months—the relatively limited investment, particularly in structures, is primarily targeted to repair and replace existing capital. So, what do these results suggest for productivity, given the important role that today’s investment growth plays in tomorrow’s labor productivity growth? 

Investment Through the Pandemic
Although the COVID-19 pandemic created a consumption-driven decline in economic activity in 2020, non-residential fixed investment was also impacted. Amidst the shock and uncertainty of COVID-19, investment in non-residential structures dropped notably in the second quarter of 2020 and continued to decrease throughout the year. In contrast, equipment investment grew as firms invested either to meet production demands or to adjust to a remote or socially distant work environment. For example, according to the BEA, investment in computers and peripheral equipment rose an unprecedented 84.8 percent in the second quarter (even as total equipment investment fell) and another 41.5 percent in the third quarter.

Comparing the levels of equipment and structures investment at the end of 2020 (Q4) to just before the onset of the COVID-19 pandemic (2019:Q4) is illustrative. Equipment investment, after a sharp decline in the second quarter, rebounded sharply and finished the year up 3.5 percent. Structures investment, on the other hand, declined throughout the year and is down 16 percent relative to the end of 2019.

What Do Firms Anticipate for 2021?
Every first and third quarters of the year, participants in The CFO Survey are asked about their intentions for investment in structures and equipment. In answer to the question, “Do you currently plan to purchase, construct, or renovate any structures and/or purchase any land over the next six months?”, only about one-third of respondents reported anticipated structures/land investment. This was approximately the same share that responded with the intention to invest in the third quarter of 2020.

Note: Q1 2021 data reflect results for 344 to 345 U.S. firms responding to the Q1 2021 survey (March 15–26, 2021). Results from the Q3 2020 survey (September 14–25, 2020) are shown for comparison.

When asked if they planned to purchase equipment, about two-thirds of firms anticipated purchasing equipment in the next six months—again, about the same as the response share in the third quarter of 2020.

The results were relatively consistent across industries, as well, with firms in most industries more likely to have planned equipment investment than planned structures/land investment in the next six months.

Note: Data reflect results from the Q1 2021 survey (March 15–26, 2021). Response numbers are as follows: Construction/real estate, mining, utilities (26 firms); Retail/wholesale trade, transportation/warehousing (52 firms); Education, health, hospitality, other services (35 firms); Manufacturing (47 firms); Business services, information, finance/insurance (125 firms).

When asked to describe the purpose of their planned investment, the most common response was to repair or replace existing structures, although the share of respondents investing for maintenance did decline since the third quarter 2020. On the other hand, the share who reported increasing capacity or creating a new product or service both increased. Interestingly, investing to reduce cost was the reason that had the largest increase in response share from the third quarter.

Note: Q1 2021 data reflect results for 117 U.S. firms that indicated they planned to invest in structures/land in the next six months in the Q1 2021 survey (March 15–26, 2021). Results from the Q3 2020 survey (September 14–25, 2020) are shown for comparison. Percentages do not sum to 100 because respondents could report more than one purpose.

Responses were similar for those investing in equipment, although without the increase in those investing for cost reduction. Most respondents reported investing to repair or replace existing equipment.

Note: Q1 2021 data reflect results for 218 U.S. firms that indicated they planned to invest in equipment in the next six months in the Q1 2021 survey (March 15–26, 2021). Results from the Q3 2020 survey (September 14–25, 2020) are shown for comparison. Percentages do not sum to 100 because respondents could report more than one purpose.

Why Are Firms Not Investing?
If a company indicated that they do not plan to invest in structures, land, or equipment, we asked them why they were choosing not to invest. The answers here are quite telling. Compared to the third quarter of last year, firms more frequently cited not needing to expand capacity as the restraining factor, rather than uncertainty or a particular need to preserve cash. As a statement on the economy, we view the lower share of firms citing uncertainty or cash preservation as positive, especially in light of the tumult of the past year.

Note: Q1 2021 data reflect results for 110 U.S. firms that responded “no” to both equipment and structures planned investment over the next six months in the Q1 2021 survey (March 15–26, 2021). Results from the Q3 2020 survey (September 14–25, 2020) are shown for comparison. Percentages do not sum to 100 because respondents could report more than one reason.

However, these results suggest that non-residential investment is likely to continue to be sluggish, at least over the next six months, which, in turn, suggests sluggishness in productivity growth going forward. It is investment that will lead to capital accumulation that can enable labor productivity growth over time. Without investment in structures and equipment today, growth in labor productivity becomes increasingly reliant on technological progress. So, what will happen to labor productivity tomorrow?

The Productivity Puzzle
The overall implications of the Q1:2021 results from The CFO Survey are as follows: (1) Uncertainty in the economy has declined; (2) A minority of firms intend to invest in structures and a majority intend to invest in equipment; (3) The share of firms planning to invest has not changed much since the third quarter of 2020; and (4) Much of the investment is intended not to expand capacity, but to repair existing capital. These results imply that we should not anticipate investment growth to be much stronger in the coming months than what we’ve seen recently.

Capital growth—investment in both structures and equipment—matters to labor productivity, and thus to economic growth. Just to maintain labor productivity, we need enough investment to account for depreciation of the capital stock. In other words, without any structures or equipment investment, workers will eventually be unable to maintain their levels of productivity due to the aging and obsolescence of their current structures and equipment. This is the investment that firms make, as described above, to repair or replace aging equipment or structures. But investing to build capacity or create new products/services increases the ratio of capital to labor, thus enabling growth in labor productivity.

Recessions can bring reduced investment. Fernald (2015) estimates that shortfalls in capital accumulation reduced potential output during and right after the Great Recession. But there can also be structural changes over time. The accumulation of capital—or capital deepening—has been playing a more limited role in labor productivity growth for decades.

In a recent paper, Fernald (2021) argues that “true” capital input growth during the pandemic was obscured by business’s need to accommodate remote work, as evidenced in the computer-related investment described above. Thus, the CFO Survey’s reported growth in equipment investment might not be the kind of capital deepening that could expand labor productivity. This could also explain the large discrepancy between the 20 percent investment decline reported by firms in Bloom et al (2020) and the increased equipment investment in the first chart. (Of course, some of the investment in the last year could facilitate the adoption of new technology or ways of organizing existing inputs and thus increase what economists call total factor productivity (TFP), or more productive uses of each capital-labor combination.)

The COVID pandemic might have an effect on TFP, and some results from The CFO Survey have provided insight into how firms are implementing new technology or automation into their processes. However, if the results of The CFO Survey hold, we should not anticipate capital deepening to become a strong source of economic growth in the months and years to come.


Thank you to John Graham, Roisin McCord, Emil Mihaylov, and Nicholas Parker for assistance preparing this article.


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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.


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