Ahead of the Curve

Investing is about anticipating the next move. So what’s next?

I’ve said again and again that we are in a slow growth recovery. The economy isn’t booming and it isn’t falling off a cliff. Forget the nonsense you hear about economic stall speeds, or a bicycle falling over if it doesn’t move. The economy isn’t an airplane and it isn’t a bicycle. It’s a complex network of relationships among buyers and sellers of goods and services. If it doesn’t go forward it goes backward (recession). There is no magic number where growth stops, just like there’s no Magic 8-Ball that predicts the future.

What’s holding the economy back right now is income growth. Aggregate real disposable household income has only growth around 2% per year since it contracted during the recession. This slow growth is being fed by a slowly growing workforce and slowing productivity growth. Since the only way to improve labor productivity is to invest in capital to equip workers with new technology, business investment holds the key for economic revival.

Unfortunately, real private nonresidential capital is shrinking: it’s 12% below its 2007 level. Growth opportunities abroad, a growing regulatory burden, and high corporate tax rates all discourag companies from investing in the US.

These aren’t problems that can be addressed via Operation Twist or fiscal stimulus or reforming Medicare. They’re structural issues. The good news is that Congress has tried to address them before. The bad news is the deficit Supercommittee is highly political and could fail to propose needed reforms.

But this is where we’re going: technological investment that spurs productivity and higher incomes. It can happen, but we need structural improvements.

[display_podcast] Ahead of the Curve

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