Thursday, April 24, 2014

Business investment still lackluster

New orders in March for capital goods, a proxy for business investment, beat expectations (+2.2% vs. +1.5%) but have managed only lackluster growth over the past year. In real terms, orders are still about 20% below the levels of 2000, and still 10% below their pre-recession high of 2006. Without more robust business investment—which provides the wherewithal for increasing worker productivity—it will be difficult for the economy to do much better than 2-3% growth.

We can only speculate as to why businesses have been so modest in their investments for the future, but likely candidates for explanations include excessive regulatory burdens (e.g., Obamacare, Dodd-Frank), very high corporate tax rates compared to many other countries, anti-business sentiment in Washington, and a general unwillingness to take risk. Lackluster business investment has nothing to do with a lack of profits, since corporate profits after tax are at all-time record highs (see chart above). 

It's disappointing, to say the least, to see so much potential new investment being held back for reasons that could be addressed by smarter public policy. But the mountain of corporate profits being stashed away both here and overseas is like a bright beacon lighting the way—for those politicians who understand how to lower the barriers to new investment—to a more productive and prosperous economy in the years to come.


Benjamin Cole said...

Hear, hear for a pro-growth government and central bank.

But, in fact, business investment has been declining for years, and did so through the Bush Administration, (before Dodd-Frank and Obamacare). as you can see from the charts.

Yet we have all-time record corporate profits, by all measures.

I am not sure what to make of this. The simple bash Obama explanation does not really hold water. I wonder if it is something about measuring or investing offshore, or availability of surplus labor.

PerformanceSpeaksForItself said...

I agree with Benjamin, the whole "tax and regulations" thing doesn't make sense.
My thought is a distorted incentive structure for executive compensation. Incentives to increase stock prices now outweigh any thought of investing for future returns, similar to eating next year's seed-corn. Long-term, I think this will have many negative consequences (loss of competitiveness, lower productivity growth; etc.).

Benjamin Cole said...

BTW housing also slowing down...The Fed may be tightening up to soon, with unintended consequences and possibly very detrimental results...this what happened in Japan...

Hans said...

Gentlemen, it is record earnings in the banking sector and perhaps in the financial sector as well..