Annie
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Do you agree with this analysis? If so, what is the ultimate outcome?
Real Private Investment Flat Vs. 1998 - Investors.com
Real Private Investment Flat Vs. 1998 - Investors.com
Real Private Investment Flat Vs. 1998
By JED GRAHAM, INVESTOR'S BUSINESS DAILY Posted 06:54 PM ET
The root of the economy's ills is often said to be a lack of demand or elevated debt levels. While both explanations have merit, the underlying problem is depressed business investment.
Despite a healthy rebound in software and equipment spending over the past 18 months, real U.S. private investment has only reached 1999 levels.
That is critical because private investment is closely correlated with private employment.
Back To 1999
Private payrolls also have recovered only to 1999 levels, Labor Department data show. So have total hours worked by private rank-and-file employees.
Every dollar of GDP growth in the past dozen years has been driven by personal consumption and deficit-fueled government spending. Why is that? Because private investment has tumbled from its peak in early 2006.
This points to the real growth conundrum: Outside of a completely unexpected housing rebound, private investment can't possibly grow fast enough to spur a healthy jobs recovery on its own. But the two horses that the U.S. economy has been riding for the last several years are exhausted and unlikely to be refreshed as Washington enters an age of budget austerity.
In Q2, consumer and government spending subtracted 0.16 percentage point from GDP, becoming a drag on the economy for the first time since the recession ended.
Private business "is the only sector with the means to spend" to lift the employment picture, said Harm Bandholz, chief U.S. economist at UniCredit Research.
But to a significant extent, "companies are not willing to spend in the U.S.," he said.
A central problem has been the bursting of the real estate bubble. In 1998, business software and equipment outlays accounted for about 42% of private investment. Now it's 62% because of the sharp decline in spending on residential and nonresidential structures.
Over the past decade, cheap capital was plowed into nonproductive residential investment. Since the bust, nothing has come along to fill that gap.
U.S. A Risky Bet For Business
The combination of high household debt, a cloudy fiscal outlook and the prospect of sluggish growth especially vs. emerging markets has dampened the appetite for investment in the U.S., Bandholz said.
Whether it's hiring a worker or buying a new piece of equipment, companies consider "the risk-adjusted return," said Mark Vitner, senior economist at Wells Fargo Securities.
Given increasing economic, tax and regulatory uncertainty including sweeping rules from new health care and financial reform laws still to be finalized companies are setting a higher bar for spending.