Thursday, February 27, 2014

Business investment still sluggish



January capital goods orders beat expectations (+1.7% vs. -0.2%), but they've been relatively flat for the past year. Plus, as the chart above shows, orders in real terms are still some 20% below their 2000 peak, and nominal orders are only marginally higher than they were 14 years ago. We're talking sluggish business investment for more than a decade, and that's one good reason why economic growth has been sluggish in the current recovery. Capex is the seed corn of future productivity growth, so without some meaningful gains in this key variable we are unlikely to see economic growth exceed 2-3% per year.


The lack of stronger business investment in capital goods is notable given the very strong growth of corporate profits, as the chart above suggests. Corporate profits after tax are now at all-time highs, both nominally and relative to GDP, having more than tripled since 2000, from $520 billion to $1.7 trillion.

How to explain this? One explanation is simply that the meager gains in business investment are a reflection of an enduring lack of confidence, something that has been a major feature of the current recovery. Households, banks, and businesses have all been quite risk averse since the calamitous 2008-2009 recession. Another explanation is that U.S. corporations have faced the highest tax rate on profits of any developed country, which helps explain why businesses are keeping more and more profits overseas and have declined to repatriate as much as $2 trillion in foreign profits. A mere 70 U.S. companies are holding $1.2 trillion in profits overseas, according to a recent Bloomberg analysis.

The key to unlocking the growth potential of this mountain of corporate profits is adopting more business-friendly policies (e.g., cutting regulatory burdens) and cutting corporate income tax rates to a level that makes corporations indifferent to keeping profits overseas or repatriating them. How much longer can Congress ignore the growth-stifling distortions of our tax code and the deadweight loss of our regulatory burdens?

12 comments:

sgt.red.blue.red said...
This comment has been removed by the author.
sgt.red.blue.red said...

What I can't understand is why more U.S. corporations don't elect to domicile in countries with low tax rates.

Benjamin said...

Eliminate taxes on dividends or the corporate income tax. A simple idea but in government simple is what works...

zumbador said...

Scott,

Have you posted your discussion on investments that you are involved in as you have in past years? and your projections for 2014?

Thank You

William McKibbin said...

One way to clear out regulations and taxes is to simply close the USA and move to regional governments -- the idea of eliminating all Federal regulations, taxes, and other challenges simply by folding up the Stars and Stripes has real appeal for whose wanting less government -- the Federal government to undertake a minimum 40% cut in all spending immediately (tomorrow) -- but that will not happen -- thus, getting rid of the USA may be the best medicine going forward -- I can still envision the USA dividing up into a west coast country lead by Sacramento CA with socialist leanings, a Gulf coast country lead by Austin TX dominated by "rugged individualism", and a northern tier country lead by Washington DC with strong Wall Street banking ties -- we'll see...

PS: The new west coast and Gulf coast countries will eagerly embrace separatism if only to get out of the national debt, which would remain a Washington DC responsibility...

Roy said...

Thanks Scott.

1. If you'd look at a chart for capital distribution to shareholders (via dividend and buybacks) would the numbers be significant?

2. I think it would be interesting to look at the composition of these businesses as I'm wondering if the increase is also due higher margins tech companies like Apple/Google and Financials which are hoarding due to possible legal costs etc.

Thanks again.

William McKibbin said...

Let's face it, US companies are harvesting their profits in order to buy back stock and pay executive bonuses based on higher stock values -- I know this to be a fact at many companies that watch -- buying back stock is viewed as having a more direct and immediate impact on share value than investing for growth -- and the problem is not going to be fixed anytime soon by simply cutting a few regulations or modifying the tax code -- the problem with growth investing in the US is very real and unlikely to reverse in the coming decades, if not the balance of the 21st century -- we need to shake up the US economy -- folding up the Stars and Stripes would create such a shake-up -- the US is simply not positioned for growth at this point, and is unlikely to create a growth environment ahead of other regions of the world during for decades to come -- see my previous post for more...

Scott Grannis said...

zumbador: check my post on Dec. 30 2013

zumbador said...

THANK YOU….I got a bit too busy with family still here with us in AZ at that time….so I appreciate you referencing the post on 12/30/13

Your info is very valuable and I greatly appreciate all the data and commentary that you provide….sorry I am not more "opinionated" in typing responses…but "that fact" is just me-being-me….quiet!

Hal Tearse said...

Scott,
As an investment professional for 38 years I find your information and ideas to be quite refreshing and informative. Most 'Experts" in the financial media are selling something which clouds their objectivity. Your data and interpretations are free of the sell pressure. I also am a fan of Bryan Wesbury and have meet him several times. Thanks for the work you do and I am amused by some of the other posts on the site.

Hal Tearse said...

I work for a large financial institution from Canada. We recently wanted to expand to the US banking business and looked at several acquisitions. Once all of the due diligence was done it was determined that the best investment that could be made today was to buy back our own stock. The reasoning was is that it was and is a better use of capital than buying a business that did not fare as well as ours. Did the CEO get a big bonus from it? No. But as shareholders all of us benefit from good decisions. Sorry Bill but I think you are heading down the wrong track. Growth in the US is slow due to misguided government monetary and fiscal policy and a tidal wave (ocean metaphor) of burdensome regulatory hurdles that all business people need to navigate. In spite of these headwinds the economy should continue to grow after the weather settles down across the country!

Scott Grannis said...

Hal: thanks for your words of encouragement. I do think that this blog format helps me express opinions that I might not otherwise feel free to express. I have no financial interest in generating more hits or in cheerleading any particular view. For me, it's a form of discipline, and I'm happy if I'm right and if that helps others.