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Business Investment in the United States: Facts, Explanations, Puzzles, and Policies d Jason Furman Chairman, Council of Economic Advisers Progressive Policy Institute September 30, 2015 Real Business Investment Has Slowed, Despite Strength of the Recovery Real Business Fixed Investment and Nonfarm Employment 4-Quarter Percent Change 15 4-Quarter Percent Change 4 10 3 5 2 2015:Q2 0 Nonfarm Employment (right axis) Real Business Fixed Investment (left axis) -5 -10 -1 -2 -3 -4 -15 -20 1 -5 1990 1995 Note: Shading denotes recession. Source: Bureau of Economic Analysis; Bureau of Labor Statistics. 2000 2005 2010 2015 -6 1 Investment is Below its Pre-Recession Trend Across the Advanced Economies Business Fixed Investment Across Advanced Economies Equipment Investment Across Advanced Economies Log Index, 1990=0 1.4 Log Index, 1990=0 1.4 1.2 1.2 1.0 1.0 0.8 2014 1990-2004 Linear Trend 0.6 0.8 Actual 0.4 Actual 0.2 0.0 -0.2 1990-2004 Linear Trend 0.6 0.4 0.2 2014 0.0 1990 1995 2000 2005 2010 2015 Structures Investment Across Advanced Economies -0.2 1990 1995 Log Index, 1990=0 1.4 1.20 1.2 1.00 1.0 0.80 0.8 0.60 0.6 0.20 Actual 2014 2010 2015 2014 1990-2004 Linear Trend 0.4 1990-2004 Linear Trend 0.00 -0.20 2005 Residential Investment Across Advanced Economies Log Index, 1990=0 1.40 0.40 2000 0.2 Actual 0.0 1990 1995 2000 2005 2010 2015 -0.2 1990 1995 2000 2005 2010 2015 Note: The figure, modeled on IMF (2015), presents data for 28 advanced economies: Australia, Austria, Canada, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Israel, Italy, Japan, Korea, Latvia, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, Singapore, Slovak Republic, Slovenia, Spain, Sweden, United Kingdom, and United States. Source: International Monetary Fund; national authorities via Haver analytics. 2 Business Fixed Investment has Driven the Reduction in Investment Growth Across Advanced Economies Decomposition of the Investment Slump, 2008-2014 Average Percent Deviation from Spring 2007 Forecasts 5 0 -5 -10 -15 -20 Public Residential Business Total -25 -30 -35 Advanced Economies United States United Kingdom Japan Peripheral Core Euro Area Euro Area Other Note: The figure shows the deviation of investment between 2008 and 2014 from forecasts made in the spring of 2007. The black squares indicate the average percent deviation of total investment. The divided into different colored segments show the contribution of the components of investment—business, residential, and public—to the deviation. Public sector contributions to residential and nonresidential investment are excluded from these categories when data for these contributions are available. The Peripheral Euro Area category includes Greece, Ireland, Italy, Portugal, and Spain. The Core Euro Area category includes the rest of the Euro Area economies in the list of 28 advanced economies included in the note to the previous figure. 3 Source: International Monetary Fund (Fiscal Monitor database); Consensus Economics; national authorities via Haver Analytics. Equipment and Structures Investment Slowed While Intellectual Property Products Investment Accelerated Contributions to Real Business Fixed Investment Growth Percentage Points, Annual Rate 10 Equipment 8 Structures 6 IP 4 Total Business Fixed Investment Growth 2 0 -2 2009:Q4-2011:Q4 Source: Bureau of Economic Analysis; CEA calculations. 2011:Q4-2014:Q4 2014:Q4-2015:Q2 4 Slower Investment Growth in 2015 is Entirely Attributable to the Collapse in Drilling Investment Contribution to Real GDP Growth from Select Components of Business Investment, 2013-2015 Percentage Points, Annual Rate 1.2 0.9 1.0 0.8 0.6 0.5 2013 2014 2015:H1 0.6 0.4 0.2 0.0 0.1 0.0 -0.2 -0.4 -0.6 -0.8 -0.6 Business Fixed Investment (excluding Drilling) Drilling Note: “Drilling” refers to the mining exploration, shafts, and wells category of investment in the National Income and Product Accounts. All growth rates and contributions are Q4/Q4, except 2015:H1, which is 2015:Q2/2014:Q4. 5 Source: Bureau of Economic Analysis; CEA calculations. Current Rates of Investment Growth are in Line with the Path of Overall Output Growth Real GDP and Business Fixed Investment 4-Quarter Percent Change 10 4-Quarter Percent Change 20 GDP (Left Axis) 8 6 16 12 4 2015:Q2 2 8 4 0 0 -2 -4 Investment (Right Axis) -4 -8 -6 -12 -8 -16 -10 1980 Note: Shading denotes recession. Source: Bureau of Economic Analysis. 1985 1990 1995 2000 2005 2010 2015 -20 6 Business Outlook has Improved in Recent Years, Despite Claims of Uncertainty Business Outlook, Next Six Months Diffusion Index 140 Economic Outlook 120 (CEOs, right axis) 100 Net Percent Expecting Increase 70 General Activity Expectations (Regional 60 Manufacturers, left axis) 50 40 2015:Q3 30 80 60 20 40 10 20 0 -10 -20 0 Sales Expectations (Small Businesses, left axis) 2003 2005 2007 -20 2009 2011 2013 2015 -40 Note: The general activity expectations of regional manufacturers is the Federal Reserve Bank of Philadelphia’s Future General Activity Index. The small business sales expectations index is the National Federation of Independent Business’s Small Business Optimism Index. The CEO sentiment index is the CEO Economic Outlook Survey Diffusion Index, for which readings above 50 indicate expansion. 7 Source: Federal Reserve Bank of Philadelphia; National Federation of Independent Business; and Business Roundtable. Corporate Bond Spreads and Policy Uncertainty Have Largely Recovered from the Crisis Measures of Economic Uncertainty Index (2001-2007 Average = 100) 400 350 Economic Policy Uncertainty Index 300 250 200 150 VIX Market Volatility Index Aug-15 100 50 0 2000 2005 2010 2015 Note: Shading denotes recession. Source: Chicago Board Options Exchange; "Measuring Economic Policy Uncertainty". (2012). Scott R. Baker, Nicholas Bloom and Steve Davis. Stanford mimeo. 8 Gross Investment as a Share of GDP has Fallen Since the Great Recession Gross and Net Investment Percent of Gross Domestic Product 30 25 Gross Domestic Investment 2015:Q2 20 1947-1990 Averages 15 10 5 0 1950 Note: Shading denotes recession. Source: Bureau of Economic Analysis. Domestic Investment Net of Depreciation 1960 1970 1980 1990 2000 2010 9 Equity Returns Have Grown More Highly Skewed Distribution of Annual Returns on Equity Across S&P 500 Count of Firms with Given Return on Equity 25 20 15 1991 2014 10 5 0 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45 50 55 60 Return on Equity (Percent) Note: The annual return to common equity is displayed for the stated year (i.e. 1991 or 2014) for all members of the S&P 500 as of the last week of May the following year (i.e. 1992 or 2015). The distribution of returns covers all members of the S&P 500 in the year indicated and buckets firms by single percentage-point intervals, smoothed by averaging over five percentage-point intervals. The tail ends of the distribution (above or below a 60 percent or 20 percent return on equity, respectively) were trimmed for optical clarity. 10 Source: Bloomberg Professional Service; CEA calculations. Deciphering Quality Improvements for Calculating Price Changes is Challenging Change in Nominal Business Investment Percent Change, Annual Rate 8 Real Investment 7 Investment Prices 6 5 4 3 2 1 0 1980-89 1990-99 2000-09 2010-15 Note: Investment prices reflect the implicit deflator for private nonresidential fixed investment. The deflator was calculated by dividing real private nonresidential fixed investment in chained 2009 dollars by nominal private nonresidential fixed investment. 11 Source: Bureau of Economic Analysis; CEA calculations. Reduced Capital Deepening Accounts for Two-Thirds of Reduction in Productivity Growth Since Crisis Sources of Productivity Growth, 1948-2007 vs. 2010-2014 Percentage Points, Annual Rate 3.0 2.5 2.3 0.2 2.0 1.5 0.9 Capital Intensity 1.0 0.5 Labor Composition 1.2 Total Factor Productivity 0.2 0.6 0.0 -0.5 0.7 -0.2 1948-2007 Note: Displayed series are the contributions to labor productivity growth in the private nonfarm business sector. Source: Bureau of Labor Statistics; CEA calculations. 2010-2014 12 The President’s Agenda to Increase the Quantity and Quality of Investment • Relieve the Sequester • Public R&D Investment • Public Infrastructure Investment • Business Tax Reform • Supporting Innovation • Supporting Manufacturing • Supporting Small Businesses • High-Standards Free Trade Agreements 13 Business Investment in the United States: Facts, Explanations, Puzzles, and Policies d Jason Furman Chairman, Council of Economic Advisers Progressive Policy Institute September 30, 2015