Why is business investment so weak?
Photo: Folkert Gorter. Source: Superfamous
Business investment is critical to the economy. Our economy consists of about 70% consumer spending, 20% government spending, and 10% investment spending. But that 10% is the basis for future economic growth. This is how companies make themselves more productive, how they improve their processes, how they expand into new markets.
But business investment has been weak during this expansion, and most recently has fallen to just 2.2%. For an economic component that is supposed to lead the economy higher, that’s an anemic level. What’s wrong?
Souce: St. Louis Fed
Part of the reason may be a hangover in residential structures from the last downturn. During the housing boom, we built a lot of houses. Until that overhang is cleared, we’re not going to build many more. Part of it has to do with oil prices. One area of dramatic spending growth had been oil development in North Dakota and Texas via fracking and horizontal drilling. When crude prices collapsed last year, investment in new rigs plummeted. Finally, labor has been cheap. Wages are growing at a very slow pace, despite the continued decline in unemployment. Inexpensive labor encourages companies to hire more people rather than invest in new technology.
Post-recession business investment has grown at the slowest pace since 1980. Source: WSJ
No matter the reason, the slow pace of business investment is troubling. Investment helps productivity grow, and productivity growth lays the foundation for rising profits, rising incomes, and an improving economy. If we ever want to see the economy move back to normal, businesses have to want to invest in their future.
Douglas R. Tengdin, CFA
Chief Investment Officer