Thursday, June 24, 2010

The pace of business investment is strong, but the level is still disappointing

New orders for capital goods in May were 17% higher than a year ago, and that amounts to very strong growth in business investment. At this pace, capital spending will regain its 2008 high in about a year. That's much faster than the recovery from the 2001 recession, when it took six years to recover to previous highs. But as impressive as is the growth rate of business investment currently, the level is remarkably low, given the absence of growth over the past 10 years. Moreover, corporate profits after tax have doubled over the past 10 years, yet business investment is flat. Cash is piling up in corporate coffers, and much of that cash is effectively being borrowed by the federal government to fund its deficit.

While things are definitely improving on the margin, the underlying strength of the economy is being undermined by deficit-fueled government spending that we can be sure is far less productive than if the same amount of money were being spent by the private sector. Once again, a reason to expect that overall growth in the economy will be less than robust (which, given the depths of the prior recession would be on the order of 6-8%), but still somewhat better than average (long-term trend growth is probably 3%). So I'm sticking with my forecast of 3-4% growth over the next few years.


Cabodog said...

One can only imagine the potential of this market -- and country -- if we had a government that wasn't intent on destroying America.

Scott, off topic, but wanted to pass these gems to you:

And, very powerful statement from Steve Wynn:

My thoughts are that despite the growth that you predict, our financial markets will be indecisive and underpriced until some direction for the country is decided in November.

When one of the top CEOs in the country publicly states that China offers a more stable business environment than America, who in their right mind would want to invest in America?

Benjamin Cole said...

I don't think corporate cash is being borrowed to fund the deficit--I think global capital markets are being tapped, and there is gobs of capital with no home.

That is not to say that the "deficit doesn't matter"--the old Bush and Reagan theme. I think they matter very much, and should be reduced, by 15 percent across the boards whacks in federal spending if necessary.

Scott Grannis said...

But cash is fungible. Maybe the corporate profits are invested in non-cash stuff (and they likely are), but that just frees up cash. On a flow of funds basis, the corporate sector is contributing gobs of money and the public sector is borrowing gobs of money.