More capital, please.

Photographer: Luke Sharrett/Bloomberg

Two Charts Show What’s Missing From the Economy

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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For all the progress the U.S. economy is making toward healing the damage done by the last recession, there’s something missing: Businesses just aren’t investing the way they used to.

Last week’s report on U.S. gross domestic product offered some assurance that the economy has enough momentum to allow the Federal Reserve to pull back a bit more on its stimulus efforts. Output grew at an inflation-adjusted, annualized rate of 2.9 percent in the three months through September, driven in part by a jump in exports.

In some crucial ways, though, businesses aren’t acting like they have a lot of confidence in the future. Consider the pace at which they are expanding their capital base -- investment in the buildings, equipment and know-how needed to support growth, minus depreciation. It turned negative for the first time on record during the recession, and has yet to recover to the rate of previous expansions. Charted over the past several decades as a percentage of GDP, it looks a bit like the bounce of a dying tennis ball:

Net Fixed Business Investment
Source: Bureau of Economic Analysis

Combined with net government investment -- which has failed to pick up the slack by, say, repairing crumbling roads and bridges -- the chart looks even worse:

Net Fixed Investment, Business and Government
Source: Bureau of Economic Analysis

What gives? To some extent, the longer-term downward trend might have something to do with a broader shift in the economy toward less capital-intensive activities. Creating a new iPhone app, for example, doesn’t require the kind of investment that building a steel factory does -- though there are significant exceptions, such as the giant battery factory Tesla Motors Inc. is building in Nevada.

As regards what’s happening in this particular expansion, one pessimistic read is that with profits decelerating and global economic growth looking weak, businesses don’t see much reason to invest in producing goods and services that might not be in much demand. The persistent lack of animal spirits, in turn, could be eroding the economy’s productive capacity.

Another possibility is that, given a historically low employment rate and meager wage growth, workers are so cheap that businesses prefer hiring to investing in capital. This would help explain why job gains have outpaced the broader economy, and why productivity growth -- measured as output per hour worked -- has been so slow. If so, investment should eventually pick up if the Fed succeeds in getting wages to rise faster.

One bright spot is that businesses do still seem to be spending on research and development. Investment in so-called intellectual property products, such as patents, has been rising at an average annualized pace of almost 5 percent, adjusted for inflation, for the past few years. So if and when businesses do decide to put more money into fixed capital, they might know what to do with it.

Policy makers don’t have to wait and see. As the International Monetary Fund has repeatedly argued, coordinated fiscal stimulus could do a lot to boost global growth and tilt the balance toward better outcomes. When the U.S. presidential election is over, maybe the winner can lead the way by investing in the country’s infrastructure.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Mark Whitehouse at

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James Greiff at