Business Investment Drought Worsens

To me, the big news in the first quarter GDP data is that the business investment drought has worsened.  I compare the actual level of real business investment with the long-term trend level (assuming that the ten-year growth rate as of 2007IV had continued). Here’s what we see:

As of the first quarter, real nonresidential investment is 23.1% below its long-term pre-crisis trend, slightly wider than in the fourth quarter of 2010. This is the clearest sign of the weakness of the economy, since no one can argue we had a bubble in nonresidential investment before the crisis started. The longer this investment shortfall last, the harder it will be to recover.

Incidentally, the business investment drought is far bigger than the shortfall in consumer spending. The chart below shows the shortfall in real PCE, relative to long-term pre-crisis trend

The consumption shortfall is only 9.2% relative to the ten-year trend. That’s widening too, as real PCE growth is still below the long-term trend. However, given the fact that the U.S. was supposedly over-consuming before the crisis, a 9.2% shortfall may not be big enough!

Here’s another comparison:


  1. Be prepared for non-residential investment to fall a lot more and that’s a good thing, as it is an antiquated industrial age indicator. First I’ll note that computer hardware and software investment now dominate non-residential investment, which is as it should be. However, in an information and service economy, the only real investment that matters is in the information and skills of the workers, which I don’t believe is included in the data for non-residential investment.

    For example, I calculated some time back that when I rent out a server on which to deploy my website, the cost of the hardware and software is now so cheap, partly because I’m using mostly open source software for which I’m charged nothing, that I’m essentially only paying my webhost for the minimal human tech support that I receive. Look at the hardware/software investment costs of a Google versus their labor costs: for all the billions they spend on giant data centers with thousands of servers, their labor costs dwarf their physical “investments.” Yet another example of how these BEA-aggregated stats aren’t very useful.

  2. America has an abysmally low net fixed business capital investment as well as a dreadfully low machine tool production and consumption due to policies favoring finance capitalism, globalism, and Military Keynesianism. Perhaps America should devote lion’s share of its resources to capital investments as Germany, China, Japan, and Switzerland are doing.


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