Delta's computer nightmare reveals the biggest problem in corporate America

It’s been a bad week for Delta. 

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

Bloomberg’s Michael Sasso and Thomas Black reported Tuesday that this outage could dent Delta’s third-quarter earnings buy as much as 10%, according to some estimates. Sasso and Black also noted that this outage serves as a wake-up call for the airline industry and their outdated computer systems. 

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

The most recent GDP report 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 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. 

Looking into the details of business investment trends makes clear corporate America is dropping the ball on things like upgrading outdated computer systems that can cause massive delays.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 current structures, equipment, and technologies already in place 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. 

Additionally, this failure of existing, but dated, computer systems puts further pressure on the scourge of economists the world over: productivity. 

Time spent in an airport or on a plane held on a ground stop is, obviously, 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 non-farm productivity in the US fell 0.5%, the third-straight quarter worker output fell.

And in the wake of Robert Gordon’s zeitgeist-defining “The Rise and Fall of American Growth” — which argues US productivity will simply be lower going forward as innovations like running water, microwave ovens, and air transportation (among thousands of other living-standard-raising advances) can only happen 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 labour has often been followed by an increase in productivity. 

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 outages 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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