The Government Investment Drought Continues…..

Sometimes things are not what we think they are. The conventional notion is that government has become more important under President Obama, while the private sector has stagnated. Yet in some ways the data tell a different story. Take a look at this chart.

The top (blue) line shows that private nonresidential investment has rebounded smartly since early 2009, when President Obama took office. Residential investment first dropped, and then mostly came back.

The real problem is government investment, which is down 8.3% since the first quarter of 2009, and still falling. In other words, government spending on infrastructure infrastructure, building, and equipment is declining, adjusted for prices changes.

This is just utterly bizarre. In a time when the economy is still sluggish, government investment should be the simplest thing to pump up. We need to modernize our infrastructure and bring government into the 21st century, and it’s just not happening.

Here’s another angle. This chart shows net government investment as a share of GDP.

According to this chart, net government investment is the smallest share of GDP in more than 40 years, and dropping.

Why Instagram Purchase Is Good News for App Economy Jobs

The $1 billion purchase by Facebook of Instagram, a startup with a hot mobile photo app, was played up by the New York Times as a way for Facebook to stave off competition–”eat the new start-up before it eats you, or before a competitor grabs it.”

However, there’s another way to think about the Instagram purchase. Facebook just sent a strong signal to potential entrepreneurs and venture capitalists: If you have a good idea for an app, or can find someone with a good idea for an, you can get very rich very quickly by being acquired by a Facebook, or a Google, or a Microsoft. All of a sudden starting or financing a new company, with plenty of new employees, looks a lot more appealing.

In effect, an acquisition such as this one will likely stimulate competition, investment and job growth in the App Economy. Nothing spurs business creation and job growth like the prospect of making money fast. And the existence of deep-pocketed acquirers who are willing to spend heavily accelerates entrepreneurship. One startup today (Instagram) may be replaced by five tomorrow. (This argument was made at length in a paper I wrote last fall with Diana Carew “Innovation by Acquisition: The New Dynamics of High-Tech Competition.” )

What about the argument that purchases like this one are just fueling a new bubble? My answer: Having lived through the boom and bust of the 2000s, I’d be very happy to get a repeat of the boom and bubble of the 1990s. At least the dot.com boom one left us with the Internet and a full cabinet of new capabilities, rather than a bunch of empty houses and bankrupt countries. A technology bubble beats a financial bubble, any day of the week.

My chart of the year: The investment drought continues

I’m sorry, every time I hear about the need to boost consumer spending I have to stop myself from pounding the table. As we round into 2012, the real weakness in the economy lies on the investment side, not the consumption side. Take a look at the following graph of net domestic investment as a share of net domestic product (‘net’ means depreciation is subtracted). I consider this graph, which expands on one I gave to the Atlantic, to be my ‘chart of the year’.

This chart, which runs through the third quarter of 2011, displays several disturbing patterns:

• Despite rebounding from its recession valley, net business investment as a share of net domestic product is still far below historical levels.
• Household and institutional net investment as a share of net domestic product  is at a 40-year low.
• And perhaps most disturbing, government net investment is only 1% of  net domestic product, a 40-year low.

Let me repeat that: Government net investment as a share of net domestic product is at a 40-year low. I had to check this last one a couple of times to make sure it was really true.  This is a true failure of national economic policy. Government is punking out, just at the time when a public investment surge is needed to make up for the private investment drought.  As a country, we should be investing more, not less.

Update: The original post said ‘net national product’ where I meant to say ‘net domestic product’.  Sorry.

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:

Investment Heroes: Top Companies for Domestic Capital Spending.

As we know, the U.S. is still stuck in a capital spending drought. According to my calculations, nonresidential business investment in the first quarter of 2011 was still 23% below its long-term trend.   By contrast, nonfarm employment is about 8% below its long-term trend.

But there are some companies that are still investing in the U.S.  As part of a new paper for the Progressive Policy Institute,  I identified America’s “investment heroes”: The companies which are the leaders in domestic capital spending. Here’s the table from the paper:

In 2010 AT&T was the domestic capital spending leader, by a wide margin.  Verizon was next, followed by Wal-Mart. These are companies that invested  huge sums into the domestic economy, at a time when many other companies were still holding back.  Out of the top seven “investment heroes,” 3 were telecom companies, 3 were energy companies, and 1 was a retailer.  [Before you ask, I'm not ready to release the rest of the list yet. Some companies break out their U.S. vs non U.S. capital spending, but many don't,  so it takes time to estimate and verify the breakdown based on other financial data  ].

Why is this important? We at PPI see long-term economic prosperity as resting on a three-legged stool: Investment in physical capital, human capital, and knowledge capital.  Higher levels of  investment improve the productivity of U.S. workers, which in turn should show up as higher real wages and greater international competitiveness.  Or to put it another way: Without strong  capital spending at home, the U.S. economy will sink into irrelevance. * 

 The overarching aim of economic policy should be to encourage all three types of investment, since all are essential for long-term prosperity.  In particular, those companies which continue to invest in the U.S. need to be acknowledged for their contributions to the domestic economy, especially when other companies of equal size  are investing much less at home.  I wouldn’t go as far as to give them a medal, but let’s give them their due.  Rather than resorting to financial trickery, these investment heroes are making money the old-fashioned way–by spending on productive long-lived assets which will generate economic benefits for years to come.

*Some might argue that the U.S. has been able to generate good productivity gains since 2007 without capital spending.  But as regular readers of this blog know,  I am skeptical of the stunning productivity gains that the official statistics seem to report for many industries in 2007-09, the middle of the financial crisis (see this post here, for example).

Coming Event: The Real Story about Investment and Savings

Back in January, I promised to start running lunchtime events on interpreting economic statistics in the new global economy.

I’m ready for the first one– “Lunch at PPI: The Real Story about Investment and Savings.” The blurb is below–and when we say seating is strictly limited, we mean it. RSVP to mmandel@visibleeconomy.com

Lunch at PPI: The Real Story about Investment and Savings

Dr. Michael Mandel will lead a lunch forum for journalists and policymakers to discuss key trends in U.S. and global savings and investment, with the goal of identifying potential story ideas and policy opportunities. Topics will include why investment in physical, human, and knowledge capital is essential for the future of the U.S. economy, and an examination of why the government data measuring savings and investment are woefully incomplete and misleading. Dr. Mandel is a senior fellow at the Progressive Policy Institute, formerly award-winning chief economist at BusinessWeek. Strictly limited seating.

Date: March 21
Time: 12 noon
Location:
Progressive Policy Institute
1730 Rhode Island Avenue NW Suite 308
Washington DC 20036

Our Aging Capital Stock

If things feel more decrepit and worn-out these days, it’s because they are. The average age of the U.S.  capital stock is at a 40-year high in all three major categories:  nonresidential, residential, and government. Take a look at this chart:

One unpleasant surprise after another, from the top down.
*The age of the residential stock is at its highest level in 40 years, despite the mammoth building boom of the 2000s.
*The age of the government capital has steadily risen over the past 40 years, suggesting great underinvestment in public infrastructure.
*The age of the private nonresidential capital stock has risen more or less steadily since the early 1980s, with a slight dip in the New Economy boom of the 1990s.

Let’s break it down by industry. This chart shows the change in the average age of the capital stock since 2000.

It’s kind of an odd and surprising picture. The sectors which got younger were mining, farming, and transportation. The information sector, which was supposed to be leading the economy, had the biggest rise in average age. That’s because we just weren’t investing enough in information technology over this stretch to make up for the aging of the old physical infrastructure.

Why We Struggle: Too Much Housing, Too Little Information Technology

Here’s a chart that to me sums up the past decade.  This was supposed to be the Information Revolution…but what we mostly did was build homes.

Private fixed assets are things like machinery, computers, factories, power plants, housing–all the privately-owned productive assets of the country.  From 1999 to 2009, the real net stock of private fixed assets grew by 26%, the slowest 10-year increase in the post-war period, according to data from the Bureau of Economic Analysis.

That slow growth in real private fixed assets is bad enough.  What’s worse, housing accounted for the majority, 53%,  of the real increase in private fixed assets. By comparison, information technology equipment and software–computers, software, and communications equipment–only accounted for 14% of the increase in productive assets. If we toss in spending by on ‘communications structures’, that gets us up to 16%.

In any case, the net real increase in housing fixed assets was more than triple the net real increase in IT fixed assets.  That may help explain why we are in such dire straits now—plenty of new homes, not enough investment in IT.

That’s why I’m not terribly concerned about the slow pace of recovery in the housing market.  I’d rather see money go to more productive uses.

Some caveats: This analysis does not include government assets or consumer durables.