Worn-out machines as leading indicator

By Stella Dawson

(Reuters) - Delivery trucks wear out, computers break down, software becomes outdated -- and finally businesses have to start investing in new equipment. Companies that want to remain competitive have to start spending again as an economy slowly recovers.

Four years after the downturn began, the replacement cycle shows signs of kicking into a higher gear in the United States even among small businesses, and it could give an unexpected boost to growth and employment this year.

That assumes no further shocks to the world economy caused by the euro zone debt crisis.

Greece and its bankers have yet to agree on chopping the country's debt load to 120 percent of gross domestic product by 2020, something the International Monetary Fund is demanding in return for the bailout money Greece needs to avoid a default in March.

But capital spending alone is insufficient to drive a U.S. recovery that will be strong enough to quickly lift employment as consumer demand is still limited by heavy debt loads.

In the United States, large corporations have already dug into huge cash piles to upgrade plant and equipment, adding incrementally to an economy that grew by 2.8 percent in the fourth quarter.

Now small businesses, which drive about half of U.S. economic growth and a big chunk of job creation, are increasing their spending on equipment, too, an important precursor to stronger hiring.

But the U.S. jobs report for January, due on Friday, is unlikely to show marked improvement in the labor market after strong gains in December.

Economists surveyed by Reuters forecast 150,000 new jobs in January against 200,000 the prior month. Some investment banks also warn the 8.5 percent unemployment rate could tick up as signs of a gradual firming of the economy encourages more people to return to the labor force.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said small businesses could start hiring more aggressively as the year progresses.

In the last economic cycle, they contributed about two-thirds of the jobs growth, and when they hang out the "help wanted" signs, they can be a powerful source of employment.

"Dollar for dollar in GDP terms, they generate two jobs for every one generated by a large corporation," Shepherdson said.

For the early signs of this small business revival, Shepherdson points to two factors: access to credit has improved markedly as shown by a surge in banks' commercial and industrial lending, and an index of capital expenditure intentions, as measured by the National Federation of Independent Business, is climbing.