The US economy continues to recover from the depths of the Great Recession, although its speed, trajectory and cruising altitude remain the subject of fierce debate.
What’s indisputable, however, is that one of the economy’s engines has persistently failed to ignite, despite record fuel levels in the tank.
Corporate America has never been more flush with cash. But business investment or capital expenditure — “capex” — has remained depressed, puzzling economists and strategists who have long predicted its resurgence and attendant impact on growth.
Instead, companies have chosen to dip into their collective $1.8 trillion pile of cash to re-hire workers, fund merger and acquisitions activity or buy back their own shares. Boosting growth and returns through long-term investment in their business hasn’t registered nearly as highly.
This suggests underlying demand for goods and services is weak — certainly weaker than it should be, given that the economy is five years into a recovery — and not strong enough to sustain a potential growth rate of around 2.5-3%.
The problem then becomes circular: weak demand holds back capex, which drags on growth, which depresses demand.
“Waiting for business investment to accelerate has been a painful and thankless exercise,” wrote Morgan Stanley in a recent 14-page report on capex. “A close examination of this underinvestment paints a grim picture of productivity rates and the economy’s trend growth potential.”
Since the 2008-09 economic and financial meltdown, US capex has fallen short of the trend seen over 1990-2007 by more than 15 %. That’s an annual $400 billion gap today, never mind the shortfall accumulated over the previous five years.
On some levels, this reluctance from firms to invest is puzzling. Productivity growth in the United States — the rate of growth in the level of output per worker — is near its lowest in 30 years, according to Bridgewater Associates. Spending on research, development and technology, would surely improve this trend.
The need for capex spending is also pressing because firms are reaching the point where they simply have to replace aging equipment. According to Morgan Stanley, the average age of industrial equipment is now almost 10.5 years, the highest since 1938.
But just replacing old equipment will not be enough to have a notable impact on economic growth. That will require businesses to spend over and above simple replacement rates, and so far that hasn’t happened.
If company executives can be convinced demand can hold up, the conditions for splashing the