Corporations' scant equipment spending is slowing down productivity growth and thereby reducing the U.S. economy's long-term potential.
Bob Johnson: This week's chart of the week is on business capital spending as it relates to equipment compared with the gross domestic product.
Why is this important? First, it's a very important indicator of how confident businesses are in the future. They won't be buying big equipment if they feel the economy is going to be in weak condition. So, it's a great forward indicator.
Secondly, equipment is a way you leverage your labor force. It's a way to get more productivity. The more machinery you give them, the more they will be able to produce. So, capital spending is really important. It's really only the second other factor that's out there besides labor-force growth that moves GDP forward. So, it's very important that businesses keep investing for the future.
Then, it's also important for the overall jobs market and consumer spending because these are very good jobs in these equipment industries. They pay very well, have very long hours, and have a lot of knock-on effects beyond the rather small percentage of GDP that they represent. So, they are an absolutely critical part of the economy.
Now, if we look at the graph, we can see we've gone through periods of booms and busts, and this is very cyclical. You have a certain Goldilocks syndrome. You don't want the number too high, which means you've got overcapacity and you are about to go into a recession. And you don't want it so low that you've got no productivity growth. Unfortunately, right now, we are at the very bottom of that curve. Equipment spending as a percentage of GDP is at near-record low levels. Instead, corporations are spending more of their money on stock buybacks and mergers and acquisitions at the moment. Unfortunately, this is slowing down productivity growth and the long-term potential growth of the U.S. economy.
