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Inside the Clamor over Weak Capital Investment

Despite reports of strong corporate profits, high levels of cash, and (generally) strong sentiment towards equities and returns, there remains concern over the recovery rate of the U.S., if not global, economy.

Recently, focus on this concern has centered on a major culprit: Capital Investment.

The cry came boldly from Thomas J. Duesterberg, Executive Director Manufacturing and Society in the 21st Century The Aspen Institute, and Donald A. Norman, Director of Economic Studies MAPI Foundation, in their report April report: “Why is Capital Investment Currently Weak in the 21st Century U.S. Economy?” (Note: A shorter version of the report ran here in the Wall Street Journal.)

The report notes that “U.S. capital investment spending has faltered since the dot-com speculative bubble which burst in early 2000. It has not kept pace with the economic growth, profits, cash flows or virtually any other metric one could use to benchmark investment spending. In 2014, real GDP was 8.7 percent above its level in the fourth quarter of 2007, the peak quarter prior to the Great Recession. Gross private domestic investment over the same period was just 3.9 percent higher. The trend in investment spending net of the depreciation which occurred is far worse. Net private investment totaled $860 billion in 2006; by 2013 it totaled just $524 billion.”

Further, the authors offer potential causes that underly the low investment levels, including:

  • Policy uncertainty and weak business confidence
  • Reduced animal spirits and entrepreneurialism
  • Lack of investment opportunities (“Secular Stagnation”)
  • Corporate tax policy
  • Regulation
  • Loss of market share to global competitors

Indeed, the concept that uncertainty and concern have more to do with the lack of investment than financing conditions was advanced by three economists at the Bank for International Settlements in a piece titled “(Why) Is investment weak?” They wrote: “In spite of very easy financing conditions globally, investment has been rather weak in the aftermath of the Great Recession. What explains this apparent disconnect? The evidence suggests that, historically, uncertainty about the future state of the economy and expected profits play a key role in driving investment, and financing conditions less so. As a result, investment after the Great Recession appears to have been broadly in line with what could have been expected based on past relationships. A stronger recovery of investment would seem to depend on a reduction in economic uncertainty and expectations of stronger future growth.”

There are costs to the lagging capital investment. As Bob McTeer, Distinguished Fellow at the National Center for Policy Analysis (NCPA), writes in Seeking Alpha: “We need business investment spending and exports to sustain aggregate demand in the face of consumer prudence. Sluggish capital investment in recent years is the chief culprit in the pitiful performance of labor productivity, as the growth in hours worked, sluggish as it was, exceeded growth in output.”

To seek solutions, The Aspen Institute brought together a fascinating “panel of distinguished experts to explore the causes of slowing investment and possible policy options to help reverse the trend,” moderated by Nelson D. Schwartz, economics reporter, New York Times. Speakers included: Larry Gies, president and chief executive officer, Madison Industries Neal Keating, chairman, president and chief executive officer, Kaman Corporation Robert L. Stevenson, president and chief executive officer, Eastman Machine Company Donald A. Norman, director of economic studies, MAPI Foundation.

In addition, Norman from the MAPI Foundation posted a shorter analysis here: