· Like many other categories of GDP, business capital spending in the economic recovery that began in mid-2009 has lagged prior recoveries.
· Businesses must have the confidence to spend now for our economy to thrive in the years ahead.
Like many other categories of gross domestic product (GDP), business capital spending in the economic recovery that began in mid-2009 has lagged prior recoveries. Seven years in, inflation-adjusted business capital spending (otherwise known as capital expenditure, or capex) has increased by only 33% from the depths of the Great Recession. In contrast, the average gain in business capital spending in the other three economic expansions that have lasted seven years or more (those beginning in 1961, 1982, and 1991) at this point in the cycle was 62%.
The poor performance of business capital spending in this business cycle can be partially explained by the near-historic drop in energy prices between mid-2014 and early 2016, which collapsed energy-related business investment. But even outside of energy, corporations have been reluctant to spend on new plant, equipment, and research and development (R&D) in this recovery. This reluctance is one of the key factors holding down post-Great Recession productivity growth, which, in turn, is causing overall GDP to lag prior recoveries; but perhaps even worse, it may be jeopardizing future growth as well.
What’s Driving Business Capital Spending?
Business capital spending ran at an inflation-adjusted $2.2 trillion in the second quarter of 2016, up 33% from the $1.6 trillion at the trough of the Great Recession in the second quarter of 2009. As noted above, this 33% increase is unimpressive compared to the average 62% gain by this point of the other recoveries. To understand why this overall number is disappointing, we need to break it down by each of the three major categories [Figure 1]:
· Structures (office parks, malls, factory buildings, warehouses, and notably, mining and drilling structures)
· Equipment (computers, medical equipment, communications equipment, construction equipment, agricultural equipment, engines, turbines, autos and trucks for business use, aircraft, furniture, etc.)