Capital Spending Signals Sluggish U.S. Economy

Chart of the Day

Capital spending by U.S. companies has been hampered by “a traumatized economy” and will require more time to rebound, according to Milton Ezrati, a partner at Lord Abbett & Co.

The CHART OF THE DAY illustrates how Ezrati drew his conclusion, presented in a note two days ago. He tracked the percentage gap between outlays and depreciation expenses among domestic businesses, as compiled by the Commerce Department.

Last quarter’s spread, 27.7 percent, was the widest since the current economic expansion started five years ago. Even so, it was only 0.2 percentage point higher than the average during the previous period of growth, from 2002 to 2007.

“This is a very different and much less robust picture than in the economy’s past,” Ezrati wrote. The shift reflects the legacy of the 2007-2009 recession and financial crisis and the federal government’s policy response, the note said.

“These retarding forces will change only slowly at best,” the Jersey City, New Jersey-based senior economist and market strategist wrote. In the meantime, capital spending may expand no faster than it has in recent years, he wrote.

Spending on buildings, equipment and other capital items during the second quarter totaled $2.24 trillion at an annual rate. Depreciation, an accounting charge taken to reflect the wear and tear on assets, amounted to $1.75 trillion.

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