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short essays and reports on the economic issues of the day
2003 ■ Number 12

Waiting for the Investment Boom? It Might Be a While
Kevin L. Kliesen
ome economists believe that the 2001 recession ended
the Federal Reserve’s measure of manufacturing capacity
in the fourth quarter of 2001 (see the inside cover of
and real GDP since 1955. Economic theory says that
this publication). Since then, real business fixed
growth of output (real GDP) will be commensurate with
investment (BFI)—expenditures on structures and equipthe growth of capital inputs and, by extension, capacity.
ment and software—has declined at a 2.2 percent annual
From the first quarter of 1955 to the first quarter of 1994,
rate. By contrast, in the first four quarters of the typical
growth of manufacturing capacity (3.4 percent per year)
recovery, real BFI increases a little more than 8 percent.
was nearly identical to the growth of real GDP (3.3 percent
One reason why growth of real BFI has remained weak
per year). Since 1994, however, growth of manufacturing
is that real GDP growth during the recovery has been weaker
capacity (4.7 percent) has far outstripped growth of real
than normal, which is probably related to the mildness of
GDP (3.1 percent).
the 2001 recession. Geopolitical uncertainties arising from
It is possible that the sharp declines in the prices of
the conflict with Iraq and tensions with North Korea may
capital goods (particularly high-tech goods) in recent years
be another reason why business investment spending has
have become more or less permanent, inducing firms to
been unusually weak. According to this argument, firms
permanently alter the mix of their capital-labor inputs. If
have been postponing plans for new capital projects until
so, there might not be much of an overhang. But if an overthe risks become clearer. Indeed, in the policy statement
hang does exist, we would expect to see relatively slow
issued after the March 18 Federal Open Market Committee
growth of real BFI until growth in output can create demand
meeting, Fed policymakers said that, until these uncertainfor capital beyond the stock already in place. ■
ties abate, they will not be able to “usefully characterize”
the risks to the outlook.
Another explanation is that a recovery in business
investment is being hampered by a capital “overhang.”
Real GDP and Manufacturing Capacity
According to this view, the economy’s actual capital
1994:Q1 = 100
stock currently exceeds its desired capital stock because
of the investment boom of the late 1990s, which was
perhaps exacerbated by the euphoria in the stock
market. Some data support this argument: During
the record-long 1991-2001 expansion, real BFI
increased 113 percent and real GDP increased by
about 39 percent. In contrast, during the 1961-69
expansion (the second-longest) real BFI increased 95
percent and real GDP increased by about 51 percent;
and in the 1982-90 expansion (the third-longest), real
Real GDP
BFI increased 42 percent and real GDP increased by
about 37 percent.
The strongest rates of business capital spending
during the 1991-2001 expansion occurred toward its
end. The accompanying chart shows this by plotting
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Views expressed do not necessarily reflect official positions of the Federal Reserve System.