Wednesday, November 25, 2009

Capital spending still modest

New orders for capital goods, the "seed corn" for future productivity gains, fell in October, and so far they are up only modestly (5.5%) from their low of earlier this year. It would appear that businesses are not in a rush to invest their rising profits. The improvement to date doesn't seem significantly different from what happened following the 2001 recession, and that recovery was notorious for being a "jobless" recovery that took several years to get off the ground. Policies out of Washington are not helping the situation, as businesses contemplate the impact of rising taxes and a more burdensome regulatory environment.

Indeed, if we compare capital spending and corporate profits, we see a glaring disconnect. Corporate profits have increased 75% since the end of 2001, but capital spending has increased only 9% over the same period. This is speculation, but it might be the case that much of the unspent profits have ended up being invested in Treasury bills and bonds, lent to the government to fund transfer payments and make-work projects, instead of being invested in new plants and equipment.

The lack of business investment, and the dearth of policies designed to encourage new investment, are the main factors driving bleak forecasts of economic growth.


Bill said...


Does this report lead you to conclude that the recovery will be more of a U than a V? I also saw one analysis that suggests that the decline in non-residential construction spending could also be driving the slow capital spending.

Scott Grannis said...

I still think this will be a V recovery. It's already a V, given the significant improvement in so many areas. I think we'll see growth of 3-4% on average. If this were a normal recovery following such a deep recession, we would see growth of 5-6%. 3-4% will actually amount to a very modest recovery.

Bill said...

Thanks so much for your reports. You are a great antidote to the drumbeat of bad economic news. Have a happy Thanksgiving.

Scott Grannis said...

Thanks, and may everyone enjoy a pleasant Thanksgiving holiday.

Benjamin Cole said...

I wish the pendulum was truly swinging to the right.

In fact, the R-Party is deeply enmeshed into a wide-ranging system of subsidies and market distortions.

$8 billion for rural telephone subsidies--much larger than the clunkers program. Except the clunkers program was sunsetted. Rural telephone subsidies are forever. That is one example.

More than $50 billion a year in farm subs.

An energy program that is based on corn ethanol--another farm subsidy in drag.

The incredible ossified lard, patronage that has become our military, now an exceedingly expensive mercenary force.

Here is a truly daunting fact: More than one-half of federal income taxes are eaten up by the Department of Defense, Homeland Security, the Department of Agriculture, the VA, and something called "civilian defense." Check it out. Those are all "right-wing" programs (not really, but what passes for the right-wing today).

Remember, the huge entitlement programs, Social Security and Medicare are financed by payroll taxes. The aforementioned programs are largely financed by income taxes on individuals and corporations.

Remember--federal spending flows into rural states and districts, from urban areas. Who reps rural areas? Check out Tax Foundations charts on spending and federal taxes by state. Red states are freeloading on blue, urbanized states.

Did not anyone ever wonder why during the years of R-Party supremacy, 2000-2006, with R-Party control of House, Senate, White House, and Supreme Court, we had huge flows of red ink?

That Reagan, Bush and Bush all proposed federal budgets with huge red ink?

That no Republican ever asks, "Why does it cost $1 million a year per US soldier on the ground--not even counting gigantic overhead back in the states?"

Ron Paul seems a little strange--until one really looks at federal spending and subsidies, and our endless foreign entanglements.

The R-Party will never balance the budget. Never. They are deeply married to huge and wasteful federal spending for military and rural programs. They bring home the bacon to their constituents.

That said, I see a global recovery on the way too. Led by Asia, Europe follows.

The future is in China. They do not suffer a huge parasitic military, nor subsidize weakling, knock-kneed rural economies. They will rush right past us.

Vote for Ron Paul--I am not a libertarian, but if you think the R-Party stands for any sort of sound economic principles...

Benjamin Cole said...

BTW, before I got carried away, I wanted to say this looks like a very nice blog, deeply insightful....

Scott Grannis said...

Benjamin: I'm a libertarian and I am very disappointed with the Republicans. But at this point they appear to represent the only hope for a return to some sort of fiscal discipline.