U.S. Economic Watch
31 March 2016
Economic Analysis
Business Investment: Stuck Between Uncertainty and Change
Shushanik Papanyan
•
Business perception of uncertainty is overstated relative to its true impact
•
Equipment investment is back at its long-term growth rate as of 2011
•
The share by industry in equipment investment has become more dispersed
The sharp decline in business investment during the Great Recession and the lack of strong growth in the postrecession economic environment have become worrisome to many economists and global organizations,
including the International Monetary Fund (IMF) and the Organization for Economic Co-operation and
Development (OECD). This is due to the crucial contribution of business investment to the economy’s future
productive capacity and competitiveness. There is general agreement among economists that a productivity
slowdown is often due to the failure of investment to keep the capital stock growing at the same pace as the
number of workers. Within investment expenditures, investment in equipment and software is a predominantly
1
productive contributor to capital stock and economic growth.
The depth of decline in aggregate demand during the Great Recession coupled with the subsequent slow
recovery are the most common factors cited as the cause of weakness in business investment. While weak
sales are a contributing factor, alternative factors to consider for the weak growth rate in equipment investment
are policy uncertainty and financial market volatility. However, when compared to past economic expansions the
current expansion appears much weaker in terms of output growth than it does for business investment,
especially for equipment investment. The expansion-by-expansion capital stock analysis of equipment and
software investment highlight that the U.S. has been undergoing long-term and sizable structural shifts in the
economy’s industry make-up. These structural shifts towards higher contributions to capital stock from service
oriented sectors and a declining share of capital stock from manufacturing, underline the weakened linkage
between equipment investment and productivity. Thus going forward, focusing on the broader weaknesses in
economic activity could boost potential output and consequently encourage higher business investment.
Table 1
Contributions to Real GDP Growth, Average of Quarterly Real Growth, SAAR, %
Recessions
Gross Domestic
Nonresidential
Fixed Investment
Product
Fixed Investment
Equipment
Investment
Expansions
Gross Domestic
Nonresidential
Fixed Investment
Product
Fixed Investment
Equipment
Investment
Dec/1948-Oct/1949
-1.4
-0.8
-1.4
-1.1
Nov/1949-Jul/1953
7.8
1.0
0.8
0.4
Aug/1953-May/1954
-2.4
0.0
-0.2
-0.4
Jun/1954-Aug/1957
4.1
0.8
0.7
0.4
Sep/1957-Apr/1958
-3.8
-2.0
-1.7
-1.5
May/1958-Apr/1960
5.7
1.3
0.8
0.6
May/1960-Feb/1961
-0.4
-0.6
-0.5
-0.8
Mar/1961-Dec/1969
4.9
1.0
0.8
0.5
Jan/1970-Nov/1970
-0.1
-0.2
-0.5
-0.4
Dec/1970-Nov/1973
5.1
1.4
1.0
0.8
Dec/1973-Mar/1975
-2.5
-2.1
-0.9
-0.6
Apr/1975-Jan/1980
4.3
1.4
1.0
0.6
Feb/1980-Jul/1980
-4.3
-2.8
-1.2
-1.0
Aug/1980-Jul/1981
4.5
1.1
1.2
0.6
Aug/1981-Nov/1982
-2.0
-1.3
-0.9
-0.7
Dec/1982-Jul/1990
4.3
0.9
0.6
0.4
Aug/1990-Mar/1991
-2.7
-1.7
-0.9
-0.6
Apr/1991-Mar/2001
3.6
1.2
0.9
0.6
Apr/2001-Nov/2001
0.6
-1.1
-1.2
-0.7
Dec/2001-Dec/2007
2.8
0.5
0.5
0.3
Jan/2008-Jun/2009
-2.8
-2.6
-1.6
-1.2
Jul/2009-Dec/2015
2.1
0.7
0.6
0.4
Historic Average
-2.0
-1.4
-1.0
-0.8
Historic Average
4.5
1.0
0.8
0.5
Source: BBVA Research & BEA
1
Kopcke (1993); De Long and Summers (1990)
U.S. Economic Watch
31 March 2016
Explaining Weakness in Business Investment in Equipment
There are several notions regarding the direct relationship between business investment and economic activity.
The most straightforward explanation is that firms hold off investing in capital when the current or expected
future economic environment is weak. Limited opportunity to sell their products causes firms to reduce
investment. Additionally, more complex macroeconomic theory puts forward a “financial accelerator” channel in
which poor sales impact the firm’s financial standing with regard to its existing loans and its ability to borrow and
thereby finance further investment in equipment and intellectual property. The “financial accelerator” channel
2
implies that credit markets both propagate and amplify negative shockwaves across all sectors of the economy.
Responses to the survey of small businesses, in which firms are asked to identify their single most important
problem, have consistently reported concern in two areas: fiscal policy, which includes the regulatory and tax
environment, and business specific factors including poor sales, competition from large businesses, and the cost
of insurance. Indeed, poor sales as the single most important problem peaked during the Great Recession but
has since declined to pre-recession levels. At the same time, taxes and government requirements have been
identified as a problem much more often in the last five years, highlighting the constraint on business investment
of policy uncertainty. While concern over taxes has remained almost constant and elevated for the last decade,
the concern over government requirements has been on the rise since 2008.
Similar unease with policy uncertainty was highlighted in the Business Climate Survey conducted by The
Business and Industry Advisory Committee (BIAC) to the OECD. The survey polled 27 national business
associations of both member and non-member countries and asked respondents to rate several factors as “very
important,” “important,” or “less important.” The respondents reported policy uncertainty, taxes and regulation as
the most important constraints to investment in their countries. Meanwhile, insufficient demand and financing
were not considered as important.
Chart 1
Chart 2
Business Survey on Most Important Problem
%
3 Major Single Most Important Problems
%
100
35
90
Govt Requirements
Poor Sales
30
80
Taxes
70
25
60
50
20
40
30
15
20
10
10
0
Business Specif
1990s
Labor
2000s
Monetary/Financial
Source: BBVA Research & NFIB
2
Bernanke, Gettler, and Gilchrist (1996)
2010s
Other
5
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
1980s
Fiscal
Source: BBVA Research & NFIB
U.S. Economic Watch
31 March 2016
Policy uncertainty plays a distinct role in discouraging business investment. There is a negative relationship
between uncertainty and business investment such that higher uncertainty reduces investment. Periods of
heightened uncertainty press firms to postpone planned fixed investment, as decisions on such expenditures are
hard to reverse but can be postponed until a more favorable economic environment of reduced uncertainty
3
exists.
Chart 3
2015 The Business and Industry Advisory Committee to the OECD Business Climate Survey, %
What are the most important factors that may be constraining investment in your
country at present, if any?
Policy and Regulatory Uncertainty
Taxation and Other Costs to Business
Restricted or Burdensome Regulation
Insufficient Financing
Insufficient Global Demand
Insufficient Domestic Demand
0
10
20
30
Very important
40
50
60
Important
70
80
90
Less Important
100
Source: BBVA Research & BEA
At the same time, seven years of unconventional monetary policy should have strengthened firms’ investment.
The monetary policy transition channel suggests a positive relationship between monetary policy and investment
expenditures, where accommodative monetary policy raises stock prices, increasing the net worth of the firms
4
and Tobin’s Q, and increases investment. (See “How Sensitive are Economic Indicators to Monetary Policy?”)
Expansionary
Monetary Policy
Raise in Stock
Prices
Tobin's Q
Firms' Net Worth
Increase in
Investment
Increase in Aggregate
Demand
Variance decomposition within a structural vector autoregressive model illustrates a degree of equipment
sensitivity to gross output fluctuations, to policy uncertainty, as well as to financial volatility. The policy
uncertainty measure consists of three components that quantify 1) newspaper coverage of policy related
economic uncertainty, 2) the number of federal tax code provisions set to expire in future years, and 3)
5
uncertainty about monetary policy and government purchases of goods and services at the federal level.
Overall, the idiosyncratic variation in equipment investment explains 33% of its variance, output explains 36%,
policy uncertainty 5%, and real S&P 27%. However, the outcome varies widely depending on the source of the
shock to investment such that the variance explained by real output increases to 56% if the origin of the shock is
real GDP. The same is true for the S&P which also rises to 56%. Contrary to expectations, policy uncertainty
remains as the most minor explanation with a variance increase of only to 16% when the shock originates from
uncertainty. The weight of policy uncertainty variance only increases marginally during the current expansion to
18% while the idiosyncratic equipment investment variance dominates. The impulse response functions for real
equipment investment confirm the variance decomposition outcomes as well as the inverse relationship between
equipment investment and the uncertainty measure. It takes 1 quarter longer for the uncertainty shock to
propagate through equipment investment than it does for either GDP or the S&P, while the half-life for all the
shocks is achieved within first two quarters.
3
Bernanke (1983), Dixit and Pindyck (1994)
Mishkin (2001)
5
Baker, Bloom, and Davis (2013)
4
U.S. Economic Watch
31 March 2016
Table 2
Equipment Investment Variance Decomposition
Equipment Investment, GDP and S&P 500 in real logs, Policy Uncertainty in log, 1985-2015
Equipment Investment
Gross Domestic Product
Policy Uncertainty
S&P 500
GDP Originated Shock
22.0
55.6
3.1
19.2
S&P Originated Shock
31.4
12.4
0.7
55.5
Policy Uncertainty Shock
49.4
15.3
16.1
19.2
No Schocks
32.6
35.5
5.4
26.5
Source: BBVA Research
Chart 4
Chart 5
Equipment Investment Response Function
Real Quarterly, %
Equipment Investment Response Function
Real Quarterly, %
0
7
6
5
10
15
20
25
30
0
GDP Originated Shock
Policy Uncertainty Shock
S&P Originated Schok
-0.02
5
-0.04
4
3
-0.06
2
-0.08
1
-0.1
0
0
5
10
15
20
25
Source: BBVA Research
30
-0.12
Source: BBVA Research
The Shape of Recovery
Strong comovement of business investment and GDP should prompt a similar response of both measures to the
Great Recession and the subsequent recovery. The recovery periods in GDP growth were historically classified
as “U-shaped” where output returns to its pre-recession long-term trend. Alternatively, the post-Great Recession
recovery has been plausibly an “L-shaped” recovery in which the growth rate has been reestablished
permanently below its long-term trend. When comparing the current recovery to previous ones, this “L-shaped”
recovery is apparent for GDP but not as obvious for equipment investment and its components. Notably, the
1990s cycle was exceptional with strong growth in all of the equipment investment categories and very mild
recessionary declines.
6
Friedman’s “plucking model” suggests that output is “bumping along the ceiling” of its long-term trend during the
expansions while it is plucked down during the recession. Empirical application of Friedman’s plucking model,
where recessions are modeled as the pluck in the cyclical component of investment and the trend is allowed to
switch between its long-term growth rate and a lower growth rate during the recession, makes it possible to
assess the shapes of equipment investment recoveries and to make a judgment as to whether the post-Great
7
Recession recovery was different from past recovery episodes. As such, the timing of the start of the pluck
indicates whether a deviation of the cycle from the long-term growth rate has occurred, while the end of the
pluck indicates a return to the long-term trend. Consequently, the absence of a pluck is interpreted either as no
recession or as a weak indication of recessionary behavior. Further, a complete pluck indicates a “U-shaped”
recovery while an incomplete pluck would point towards an “L-shaped” recovery.
6
7
Friedman (1964, 1993)
Kim and Nelson (1999), Kim and Murray (2002)
U.S. Economic Watch
31 March 2016
Chart 6
Chart 7
Real GDP Cycles
Normalized, Peak=100, Peak Date= 0
Real Equipment Investment Cycles
Normalized, Peak=100, Peak Date= 0
145
240
140
220
135
130
200
125
180
120
160
115
L-shaped
U-shaped
140
110
120
105
1973
1981
1990
2001
2007
100
95
90
-5
0
5
10
15
20
25
30
35
1973
1980
1981
1990
2001
2007
100
80
40
60
0
5
10
15
20
25
30
Source: BBVA Research
Source: BBVA Research
Chart 8
Chart 9
Real Software Investment Cycles
Normalized, Peak=100, Peak Date= 0
Real Information Processing Cycles
Normalized, Peak=100, Peak Date= 0
480
280
440
260
400
240
35
40
540
220
360
430
200
320
180
280
320
160
240
140
200
1973
1980
1981
1990
2001
2007
160
120
80
0
5
10
15
20
25
30
35
210
1973
1980
1981
2001
2007
1990 (rhs)
120
100
80
60
0
40
5
10
15
20
25
30
35
Source: BBVA Research
Source: BBVA Research
Chart 10
Chart 11
Real Industrial Equipment Cycles
Normalized, Peak=100, Peak Date= 0
Real Transportation Equipment Cycles
Normalized, Peak=100, Peak Date= 0
160
220
150
200
140
180
130
160
120
140
110
120
100
100
90
80
1973
1980
1981
1990
2001
2007
80
70
60
0
5
10
Source: BBVA Research
15
20
25
30
35
-10
40
1973
1980
1981
1990
2001
2007
60
40
20
40
100
0
5
10
Source: BBVA Research
15
20
25
30
35
40
U.S. Economic Watch
31 March 2016
The “plucking model” estimations reveal no evidence of an L-shaped post-Great Recession recovery for
equipment investment (Chart 11). The Great Recession recovery for equipment investment can be characterized
as U-shaped while the estimated recession probability infers 1Q10 as the end of recessionary dynamics (3
quarters after the NBER’s end-of-recession date). The plucking model implies that equipment investment has
returned to its long-term trend as of 4Q10. It also estimates the largest of all plucks during the Great Recession.
At the same time, the model demonstrates that three out of the eleven recessions examined had hardly any
recessionary dynamics, while another two resulted in only mild deviations from the long-term trend.
Evidence of an L-shaped recovery is found in Information Procession (IP) equipment investment – one of the
equipment investment components (Chart 13). Unlike the aggregate equipment investment, IP equipment
investment has exhibited substantial cyclicality during five out of the last six recessions. Moreover, the pluck
corresponding to the Great Recession has not yet converged to the long-term trend. Noticeably, the pluck for the
2001 recession is deeper than for the Great Recession and the convergence to the long-term trend did not occur
until the end of 2Q05 – three and half years after the NBER’s end-of-recession date.
Chart 13
Equipment Investment Decomposition: Cycle
%
Equipment Investment Decomposition: Trend
Real, $Billions
49
52
55
58
61
64
67
70
73
76
80
83
86
89
92
95
98
01
04
07
10
13
Chart 12
1200
0
-2
1000
-4
800
-6
-8
600
-10
400
plucks
-12
-14
200
Recessions
Cycle
-18
Recessions
Trend
0
49
52
55
58
62
65
68
71
75
78
81
84
88
91
94
97
01
04
07
10
14
-16
Source: BBVA Research
Chart 14
Chart 15
Information Processing Equipment: Cycle
%
Information Processing Equipment: Trend
Real, $Billions
59
61
64
67
70
72
75
78
81
83
86
89
92
94
97
00
03
05
08
11
14
Source: BBVA Research
400
0
350
-2
300
-4
250
-6
200
-8
150
100
-12
Recession
Cycle
-14
Source: BBVA Research
50
Recessions
Trend
0
59
62
65
67
70
73
76
79
82
85
88
91
94
97
00
02
05
08
11
14
-10
Source: BBVA Research
U.S. Economic Watch
31 March 2016
Structural Change Within
The business cycle assessment of the equipment and software investment expenditures underscored
substantial differences in the recovery dynamics during the post-Great Recession for each of the subgroups.
Despite the sharp decline during the Great Recession, the industry and transportation equipment recovered with
a speed that was similar to those of past cycles. By contrast, the information processing equipment and software
had little to no decline during the Great Recession while also exhibiting sluggish recovery dynamics. However,
these recovery dynamics in software and information processing equipment have to be assessed in conjunction
with the ongoing long-run change in 1) the deflation in prices of information procession equipment and software
and 2) the change in the contributing share from business investment.
The prices of information processing and software have been declining since the early 1980s which resulted in
78% and 35% deflation in information processing equipment and software respectively. Studies indicate that the
real investment in information processing equipment and software can be higher than reported because there
are limitations on correctly measuring quality adjusted prices of information technology components, and the fast
8
fall of those prices creates additional measurement disruptions.
At the same time, the real shares of information processing equipment, software, as well as the ratio of research
and development expenditures to real business investment has been on the rise and have suppressed
equipment and transportation shares in 2001. Comparison of the capital stock expenditures by industries during
expansions reveals long-term industry shifts in both equipment and intellectual property investment and provides
a solid backdrop to the rise of information procession and software as a share of business investments and longrun decline in the share of industrial equipment.
Chart 16
Chart 17
Ratios to Real Nonresidential Fixed Investment
Private Invest Chain Price Index
Real, $Billions
2009=100
480
160
430
150
380
140
330
130
280
120
230
110
0.1
180
100
0.05
130
0.45
Info Processing Eqpt
Industrial Equipment
Transportation Equipment
Software
Research & Development
0.4
0.35
0.3
0.25
0.2
0.15
0
47 52 57 62 67 72 77 82 87 92 97 02 07 12
Source: BBVA Research & BEA
8
Doms (2004)
90
Info Processing Eqpt
Software
80
80
85
90
80
95
Source: BBVA Research & BEA
00
05
10
15
U.S. Economic Watch
31 March 2016
In nominal terms, the Manufacturing sector’s investment in both equipment and intellectual property has
consistently declined since the 1960s as a share of total equipment investment. The share of Manufacturing
declined by 35% in total equipment capital stock and by 38% in intellectual property capital stock from the 1960s
expansion to the 2010s. Within the Manufacturing sector, shares of Durable Goods and Nondurable Goods
manufacturing of equipment investment remained roughly unchanged, but the subsectors’ shares have changed.
Within the Durable Goods Manufacturing industries, the nominal share of the Primary Metal subsector’s
investment has declined while the Computer and Electronics sector’s share peaked during the1990s expansion.
Within the Nondurable Goods Manufacturing industries, the Chemical Production and Food/Beverage
Production subsectors’ shares have consistently increased.
Chart 18
Chart 19
Expansions’ Nominal Equipment Investment by
Industry, Share of Total Equipment
Expansions’
Nominal
Intellectual
Prop.
Investment by Industry, Share of Total Intel. Prop.
Capital Stock, Private Fixed Assets, Average, %
Capital Stock, Private Fixed Assets, Average, %
Prof Services
Wholesale
Health
2010s
Management
2010s
Finance/Insurance
Finance/Insurance
Accomodation
Prof Services
Retail
2000s
Information
2000s
Mining
Manufacturing
Wholesale
Construction
1990s
1990s
Utilitites
Real Estate
Agriculture
1980s
1980s
Information
Transportation
Manufacturing
1970s
1970s
1960s
1960s
0
5
10
15
20
25
0
30
5
10 15 20 25 30 35 40 45 50 55 60 65 70
Source: BBVA Research & BEA
Source: BBVA Research & BEA
Chart 20
Chart 21
Expansions’ Nominal Equipment Investment by
Industry, Share of Total Durable
Expansions’ Nominal Equipment Investment by
Industry, Share of Total Nondurable
Capital Stock, Private Fixed Assets, Average, %
Capital Stock, Private Fixed Assets, Average, %
2010s
2010s
2000s
2000s
Elec Eq/Appl/Components
Wood Products
1990s
Apprl/Leather/All Prod
1990s
Printing/Rel Supp Act
Oth Transport Eq
Textile Mills/TM Prod
Misc Mfg
1980s
1980s
Nonmetallic Min Prod
Plastics/Rubber Prod
Machinery
1970s
Petroleum/Coal Prod
1970s
Fabr Metal Prod
Paper Prod
Comp/Elec Prod
Mtr Vhcls/Bod/Trailr/Parts
1960s
Food/Bev/Tob Prod
1960s
Chem Prod
Primary Metals
0
5
10
15
Source: BBVA Research & BEA
20
25
30
35
40
0
5
10
15
Source: BBVA Research & BEA
20
25
30
35
40
U.S. Economic Watch
31 March 2016
The share of the Finance and Insurance sector for both equipment and intellectual property investment has
increased. The Finance and Insurance sector’s share of equipment and intellectual property capital stock from
the 1960s expansion to the 2010s increased 3.3 times and 7.5 times, respectively. Within that sector, the Credit
Intermediation and Related Activities subsector continues to carry the substantial chunk of equipment
investment, while intellectual property investment for the subsector peaked during the 1990s expansion at 45%
contribution but declined slightly since then to 32% in the 2010s expansion.
Chart 22
Chart 23
Expansions’ Nominal Equipment Investment by
Industry, Share of Total Finance
Expansions’
Nominal
Intellectual
Property
Investment by Industry, Share of Total Finance
Capital Stock, Private Fixed Assets, Average, %
Capital Stock, Private Fixed Assets, Average, %
2010s
2010s
2000s
2000s
1990s
1990s
1980s
Funds/Trusts/Oth Fin Vehicles
1970s
1980s
Credit Intermed/Rel Act
Sec/Comm Contracts/Invest
Sec/Comm Contracts/Invest
Insur Carriers/;Rel Act
1960s
0
10
20
30
40
50
60
70
80
Insur Carriers/;Rel Act
1970s
Credit Intermed/Rel Act
90
Source: BBVA Research & BEA
0
10
20
30
40
50
60
Source: BBVA Research & BEA
Similar to the Finance sector, the Health Care and Social Assistance sector’s share in equipment investment
increased 2 times from the 1960s expansion to the 2010s. At the same time, while the Health Care and Social
Assistance sector’s share in intellectual property capital stock in 2010s expansion has been quite small at 1.9%,
the share has increased 3.2 fold since the 1960s. Within the Health Care and Social Assistance sector, the
Hospitals subsector remains the main contributor in both equipment and intellectual property investment.
Chart 24
Chart 25
Expansions’ Nominal Equipment Investment by
Industry, Share of Total Health Care
Expansions’ Nominal Intell. Prop. Investment by
Industry, Share of Total Health Care
Capital Stock, Private Fixed Assets, Average, %
Capital Stock, Private Fixed Assets, Average, %
2010s
2010s
2000s
Ambulatory
Health Care Svcs
1990s
2000s
Hospitals
1980s
1990s
Other
Other
1970s
Hospitals
Ambulatory Health Care
Svcs
1980s
1960s
0
10
20
Source: BBVA Research & BEA
30
40
50
60
70
0
10
20
Source: BBVA Research & BEA
30
40
50
60
70
U.S. Economic Watch
31 March 2016
The 2014-2015 oil price decline led to a slowdown in business investment in the Mining industry, shedding 1.2%
of equipment growth in 2015. However, the cutbacks in the Energy sector’s business investment are not
expected to have a visible effect on long-term growth in equipment and intellectual property investment since the
Mining sectors’ share in equipment and in intellectual property investment in 2010s expansion was at 3.9% and
0.6% respectively. These shares haven’t changed much since the 1960s. Overall, the Mining sector’s investment
has flattened, after seeing a sharp decline in Mining (except for Oil and Gas) and the Support Activities for
Mining subsectors in 2013. Notably, between the 1960s expansion to the 2010s, the share of Support Activity for
Mining in the total Mining equipment investment increased from 30% to 43% while the share of Mining (Except
Oil and Gas) declined from 37% to 22%.
Chart 26
Chart 27
Investment: Private Fixed Assets
Investment: Private Fixed Assets
$Billions, Chained Quantity Index, 2009=100
Chained Quantity Index, 2009=100
250
45
Mining (Real)
300
Oil and Gas Extraction
Mining ex Oil and Gas
40
Mining (Nominal, rhs)
250
200
Support Activites for Mining
35
30
150
200
25
150
20
100
15
100
10
50
5
0
0
50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10 14
50
0
50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10 14
Source: BBVA Research & BEA
Source: BBVA Research & BEA
Chart 28
Chart 29
Expansions Nominal Equipment Investment by
Industry, Share of Total Mining
Expansions
Nominal
Intellectual
Property
Investment by Industry, Share of Total Mining
Capital Stock, Private Fixed Assets, Average, %
Capital Stock, Private Fixed Assets, Average, %
2010s
Support Activites for
Mining
2010s
Oil and Gas Extraction
2000s
Mining ex Oil and Gas
1990s
1980s
2000s
1990s
Mining ex Oil and Gas
1970s
Support Activites for Mining
Oil and Gas Extraction
1980s
1960s
0
10
20
Source: BBVA Research & BEA
30
40
50
60
0
10
20
30
Source: BBVA Research & BEA
40
50
60
70
80
U.S. Economic Watch
31 March 2016
Bottom Line: Elusive growth in investment reveals structural shifts
The direct relationship between business investment and economic activity, such that firms hold off business
investing when aggregate demand is weak, is plausible but is hard to disentangle from the inverse causality
where weak business investment is behind weak output growth. At the same time, it is apparent that equipment
investment has returned to its pre-Great Recession long-term trend while gross output has converged to a
growth rate below its historic trend. Thus, even higher rates of equipment and software investment would be
necessary to boost productivity and achieve higher long-term economic growth. The latter is questionable
because manufacturing is losing its lead as the primary contributor to equipment and software expenditures and
is in the process of becoming overshadowed by service sector contributors, such as Finance; Professional,
Scientific, and Technical Services; Administrative and Support, and Waste Management and Remediation;
Health Care and Education. The industry shares of equipment investment capital stock have become more
dispersed as industries with a share below 10% make up 81% of equipment investment in the 2010s expansion,
compared to only 60% in the 1960s. In the absence of large contributions from manufacturing and due to the
shift from industrial equipment expenditures to information processing equipment and software, the nominal loss
in equipment and software investment expenditures is likely permanent. These structural shifts within equipment
investment also highlight weakening linkage between equipment investment and productivity.
Going forward, to boost business investment growth, policies focusing on the broader weaknesses in economic
activity that are aimed to increase potential output can become vital. The implementation of measures that
increase long-term economic outlook of potential output can bring the necessary boost to business investment.
The U.S., together with other advanced economies, reveals a linkage between declining public investment and
9
reduced levels of business investment, where a case for “crowding in” can be made. Public infrastructure
investment would revitalize short-term aggregate demand, heighten potential output, and “crowd in” business
investment.
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Review of Economics and Statistics, 78 (1): 1–15
De Long, Bradford J. and Lawrence H. Summers. 1990. “Equipment Investment and Economic Growth.” NBER
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World Economic Outlook, October 2014, IMF
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