The Homa Files

Punchline: Headlines typically say that low consumer spending is at the root of the recession.  But, gov’t data indicates another cause: low and declining business investment in plant, equipment, software, and inventories. An aggregate demand problem that is certain to be exacerbated — not mitigated — by higher taxes on business and capital.

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Excerpted from: IBD: No Recovery Until America Invests Again, 03/09/2010

The deeper story of the continuing recession can be found buried in the statistical appendix to the 2010 report of the president’s Council of Economic Advisers.

That story: a devastating decline in investment spending.

The government’s data reveal that, contrary to popular belief, consumer spending held up fairly well during the recession, falling less than 2% from the fourth quarter of 2007 to the second quarter of ’09.

A drop in private investment spending — primarily business purchases of structures, equipment, software and additions to inventories — was far more significant to the recession.

Gross private domestic investment peaked in 2006. Between the first quarter of that year and the second quarter of 2009, it fell precipitously, by nearly 34%.

This huge decline in investment spending portends an extended period of slow economic growth, lasting several years and perhaps longer. Worn-out equipment, obsolete software, ill-maintained structures and depleted inventories are not the stuff of which rapid, sustained economic growth is made.

Business firms have also fled from inventory investment, trimming their holdings by an unprecedented $125 billion in 2009 after lopping off $35 billion in 2008.

Federal government spending, meanwhile, has raced ahead. From 2007 to 2009, government purchases of newly produced final goods and services — the federal government’s “contribution” to GDP — increased by over 13% in constant dollars.

Making matters worse, the explosion of the federal government’s size, scope and power since mid-2008 has created enormous uncertainties among investors.

New taxes and higher rates of old taxes; potentially large burdens of compliance with new environmental and energy regulations and mandatory health care expenses; new, intrinsically arbitrary government oversight of systemic risks associated with virtually any type of business — all of these unsettling possibilities must give pause to anyone considering a long-term investment.

Unless Washington acts soon to resolve these uncertainties, from the cap-and-trade folly to the health care monstrosity, most investors will likely remain largely on the sidelines, consuming some of what would have been invested and protecting the remainder of their wealth in cash hoards and low-risk, low-return, short-term investments.

Full article:
http://www.investors.com/NewsAndAnalysis/ArticlePrint.aspx?id=525864

This entry was posted on March 11, 2010 at 7:52 am and is filed under Economics, Financial Crisis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.