Business Investment Blues

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

By | 2017-07-17T12:22:19+00:00 December 2nd, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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