Wednesday, August 26, 2009

Business investment rebounds

The beginning of the recovery is coming into sharper focus with each data release these days. This chart shows business investment in capital goods, and it has clearly rebounded from its lows earlier this year. New capital spending reflects rising business confidence, and it creates the seed corn for future productivity gains, so this is a very welcome sign. Investment is still awfully low compared to what it has been in the past, of course, but on the margin things are once again improving and that is what counts.


MW said...

SocGen estimate capex will be in line with depreciation this year, meaning no addition to the capital stock.

Scott Grannis said...

That's pretty pessimistic. It's also very difficult to predict capex.

MW said...

Their comment:
"To understand why capital stock is
expected to stagnate, it is
important to keep in mind that a
substantial portion of gross
business investment goes toward replacing depreciating capital.
For equipment and software,
that ratio has been close to
80%. Since the start of the
crisis, spending on equipment
and software has contracted
by about 20%, which means
that net capital formation is
now running close to zero. The
growth of capital stock is
expected to remain slow over
the next few years due to
financing constraints."

I don't dispute the difficulty of predicting capex (or anything other economic variables). Nor do I necessarily agree with SocGen. But I do think it's worth considering both sides of the argument.

Hope you enjoyed the vacation and thank you for the discussion. Regards, MW

Scott Grannis said...

Thanks for the clarification. If I had to give a reason for why capex might be muted for the next few years, it wouldn't be because of financing constraints. The Fed is doing its best to ensure that money is cheap and plentiful. There is no shortage of money out there, but it is difficult for some borrowers to get their hands on it. I don't expect those conditions will last too much longer. Banks have a powerful incentive to make loans (zero financing costs, huge lending spreads, and a promise from the Fed that borrowing costs will be very low for a long time). Sooner or later they are going to figure out how to make more loans.

In any event, it is already the case that the corporate bond market is up and running again, and lots of new borrowing is taking place.

Also, it is definitely the case that corporations are sitting on mountains of cash built up from strong profits in recent years. This could fund an awful lot of new investment if confidence in the future picks up.