Question

The Great Recession began in December 2007 and ended in June 2009. The unemployment rate rose from 5% to 9.5% during that time period. During 2010 and early 2011, as businesses began to recover from the recession in the United States, it was estimated that 94 percent of business spending went to replacing worn-out or outdated equipment. That left only 6 percent of spending for expanding operations.

What effect will this type of spending have on a firm’s balance sheet? What about its income statement?

With only 6 percent of spending allocated for expansion by businesses, how did this affect the job market in the United States?

Answer 1

Assuming (not unreasonably) that the equipment being replaced has zero or negligible book value on the balance sheet, since it is worn out and outdated, the scrapping of these equipment won't cause a charge (expense) to the Income Statement. The acquisition of the new equipment would get added to the balance sheet as capex (or fixed assets), resulting in only a minimal charge to Income Statement (to the extent of partial period depreciation).

While the money left for job creation is only 6%, the spend that goes into acquisition of equipment (the 94%) would also add to jobs in the US economy as the industries producing such equipment would grow when the businesses buy new equipment.