Is investment expenditure in the US really looking strong? I picked up some tweets on this the other day which stated that it was indeed.
The above graph shows domestic investment of US private business net of capital depreciation. A couple of points should strike you immediately: one nominal expenditure peaked back in the late 1990s; two, a lot of the retracement (or the pluck as Friedman might have said) is a consequence of the unprecedented decline seen during the dark days of 2009.
But let us look at the data in another way. Let us look at the growth rate of such investment if we use high water mark analysis. What we want to analyse is the actual growth in annual investment expenditure from prior peaks. The following chart shows annualised growth rates over 5 year rolling time frames using high water market analysis.
The following adds data for real net investment (albeit only to 2013 as per BEA table 5.2.3).
Capital investment growth peaked in the late 1990s and growth rates since that point have indicated a flattening in the growth profile of the US economy. We can use high water mark analysis to look at annual rates of change in $bn too:
The blue line shows the annual nominal change $bn (i.e. 2014 less 2013) and the red line the change off the benchmark (2014 less previous high). The blue line benefits from troughs while the red line is benchmarked off peaks. Again we see a very real weakness in the frame from the end of the 1990s. Investment expenditure still has some way to go to get back to prior levels.
We can also look at changes in net investment and sum the changes over rolling 10 and 15 year time frames ($bn). In the following chart I use real as opposed to nominal expenditures:
Are we starting to see a pattern? Yes!
The last major investment cycle peaked in the late 1990s, not unlike the dynamics of the labour market:
The last major investment cycle also coincided with an extended business cycle, itself extend my significant monetary stimulus:
We also likely saw a peak in the rate of change in real personal consumption expenditures around the late 1990s, expenditures that for much of the late 90s and early to mid 2000s were supported by debt.. PCE as a % if GDP has risen even higher raising doubts over the necessary growth in demand needed to sustain sustained increases in investment expenditure.
Real expenditures have likely been supported by falling inflation and a supportive monetary policy:
While investment expenditure has recovered post recession the fundamental backdrop remains constrained. Increases in income inequality, weak income growth, demographics, high levels of global debt and the ever present risk of asset price shocks weigh heavily on investment expenditure.
Of late growth in the major components of gross private domestic investment expenditure have slowed significantly: