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.

Budget Categories

While I was working out this morning, I was watching the supercommittee hearings on CSPAN (pretty lame, huh). And Doug Elmendorf was explaining all the categories that the committee had to be conscious of…discretionary vs nondiscretionary,  defense vs nondefense, security vs nonsecurity.

And it struck me that we were missing the most important budget categories: investment vs consumption.  Yes, I know that this is an age-old debate, whether the federal government needs a capital budget. But it would really clarify a lot of the debate.

The investment budget would of course include physical capital such as infrastructure; human capital such as education and training; and knowledge capital such as R&D.


I think that the main thing that the committee should do is protect the federal investment budget. We don’t want federal investment going back to the low levels of the 1980s and 1990s.

A Negative Sign for Investment and Job Growth

There’s a good rule of thumb–you get what you reward.

Here’s a summary of current U.S. policy towards big corporations: Invest in the U.S., create jobs, and get sued by the government.

You would think that during a business investment drought, any company that puts big money into the U.S. would be patted on the back. But no…

AT&T is the company which is putting the most money into the U.S….almost $20 billion in capital spending in 2010.  AT&T is also planning to bring back call center jobs from overseas.  AT&T is also getting sued by the Justice Department to block the merger with T-Mobile.

Frankly, this sends a signal to U.S. companies that getting out of  the reach of government regulators by going overseas is the right strategy.

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:

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

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
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.