Sluggish investment will hamper recovery
— John Kemp is a Reuters columnist. The views expressed are his own —
Unable to rely on the wounded consumer, the outlook for U.S. growth in the next three years depends on business investment and exports to take up the slack when stimulus programmes wind down.
Ultra-low interest rates will help. But with the economy struggling to work off a huge overhang of unused real estate assets, and not much sign of investment elsewhere, investment spending is set to remain sluggish, condemning the economy to a weak recovery in the medium term.
Federal Reserve Chairman Ben Bernanke and other senior U.S. officials have already warned the rest of the world can no longer rely on over-indebted U.S. consumers as the principal source of global growth. There is no choice but to rely on investment and exports to take up more of the burden.
But investment spending outside real estate has been very depressed over the last cycle; there is no reason to expect it to accelerate much before 2013 at the earliest. So despite signs of a significant cyclical improvement in manufacturing in the past couple of months, the medium-‘term outlook looks weaker.
MANUFACTURING BASE STAGNATES
Between 2004 and 2008, private sector fixed-investment averaged $2.125 trillion per year (16 percent of GDP), split evenly between spending on equipment and software ($1.025 trillion) and buildings and structures ($1.102 trillion), according to the Bureau of Economic Analysis.
Manufacturers accounted for just $188 billion (8.8 percent of the total), with a higher share of spending on software and equipment (15.8 percent) but only a tiny fraction of spending on structures (2.4 percent).
Their investment simply replaced the loss of asset values due to deprecation ($187 billion) as a result of wear and tear, loss of efficiency with aging, and technological obsolescence. There was no net increase in the manufacturing sector’s capital stock.
Instead the lion’s share of investment went into real estate ($787 billion per year, 37 percent of the total) and financial activities ($140 billion, 6.6 percent). Oil and gas extraction (6.9 percent), healthcare (5.3 percent), information industries (5.0 percent) and power and gas utilities (4.0 percent) absorbed smaller amounts.
The massive overhang of unoccupied residential and commercial real estate means there is unlikely to be substantial new spending in the real estate sector for several years while the stock of vacant homes and offices is worked off.
In the meantime, it seems unlikely manufacturers will step into the gap, given an average utilization rate of less than 70 percent, according to the Federal Reserve’s estimates. It is equally hard to see the banking system investing heavily, for all its recent return to profit.
NO IMPETUS FROM ENERGY POLICY
Until recently, the best hope for an investment-led recovery was probably an ambitious programme to upgrade the country’s energy efficiency as well as its power generation and transmission industries.
Sharp increases in fossil fuel and electricity prices (as a result of rising oil prices, a carbon tax, or an aggressive cap-and-trade scheme) would have spurred a wave of new investment in the power sector to cut emissions from coal plants and increase the share of generation from renewables, nuclear and cleaner-burning natural gas, as well as a much wider effort to reshape household and business energy consumption.
The Obama administration and environmental advocacy groups have often sought to promote cap-and-trade and financial support for new technologies in terms of creating “green jobs” and investment.
With oil prices back to $70-80 per barrel and the prospect of a national cap-and-trade scheme apparently receding, energy policy looks much less likely to drive a new wave of investment in the next 2-3 years unless state and regional schemes can force equivalent investment.