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Business Investment: Stuck Between Uncertainty and Change Shushanik Papanyan Senior Economist BBVA Research USA
Houston, Texas April 7th, 2016
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Business Investment: Stuck Between Uncertainty and Change
The depth of decline in aggregate demand during the Great Recession coupled with the subsequent slow recovery are the most common factors cited as the cause of weakness in business investment. Alternative factors to consider for the weak growth rate in business investment are policy uncertainty and financial market volatility.
When compared to past economic expansions the current expansion appears much weaker in terms of output growth than it does for business investment. The expansion-by-expansion capital stock analysis highlight that the U.S. has been undergoing long-term and sizable structural shifts in the economy’s industry make-up.
Going forward, focusing on the broader weaknesses in economic activity could boost potential output and consequently encourage higher business investment.
Please join us for an informative discussion with Dr. Papanyan
Shushanik Papanyan, Ph.D. Senior Economist, BBVA Research USA [email protected] www.bbvaresearch.com
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Elusive Growth in Business Investment
The Great Recession hit hard both aggregate output and investment; furthermore recovery growth rates have been weak, having a bearing on productivity and long-term economic growth prospects Equipment and software investment is a predominantly productive contributor to productivity and economic growth Firms hold off business investing when aggregate
demand is weak Weak business investment leads to weak output growth
4
Elusive Growth in Business Investment
Why is Equipment Investment growth weak?
Policy Uncertainty Aggregate demand Financial Markets
Has the post-Great Recession recovery been different for GDP than for Equipment and Software Investment? Have structural shifts within industry shares established a “new normal” for Equipment and Software Investment growth?
5
Elusive growth in Business Investment
Severe decline in both GDP and Investment during the Great Recession
Recessions Gross Domestic
Product Fixed Investment
Nonresidential Fixed Investment
Equipment Investment
Dec/1948-Oct/1949 -1.4 -0.8 -1.4 -1.1
Aug/1953-May/1954 -2.4 0.0 -0.2 -0.4
Sep/1957-Apr/1958 -3.8 -2.0 -1.7 -1.5
May/1960-Feb/1961 -0.4 -0.6 -0.5 -0.8
Jan/1970-Nov/1970 -0.1 -0.2 -0.5 -0.4
Dec/1973-Mar/1975 -2.5 -2.1 -0.9 -0.6
Feb/1980-Jul/1980 -4.3 -2.8 -1.2 -1.0
Aug/1981-Nov/1982 -2.0 -1.3 -0.9 -0.7
Aug/1990-Mar/1991 -2.7 -1.7 -0.9 -0.6
Apr/2001-Nov/2001 0.6 -1.1 -1.2 -0.7
Jan/2008-Jun/2009 -2.8 -2.6 -1.6 -1.2
Historic Average -2.0 -1.4 -1.0 -0.8
Source: BBVA Research & BEA
Contributions to Real GDP Growth, Average of Quarterly Real Growth, SAAR, %
6
Elusive growth in Business Investment Anemic post-Great Recession recovery in GDP but not as much in
Business and Equipment Investment
Expansions Gross Domestic
Product Fixed Investment
Nonresidential Fixed Investment
Equipment Investment
Nov/1949-Jul/1953 7.8 1.0 0.8 0.4
Jun/1954-Aug/1957 4.1 0.8 0.7 0.4
May/1958-Apr/1960 5.7 1.3 0.8 0.6
Mar/1961-Dec/1969 4.9 1.0 0.8 0.5
Dec/1970-Nov/1973 5.1 1.4 1.0 0.8
Apr/1975-Jan/1980 4.3 1.4 1.0 0.6
Aug/1980-Jul/1981 4.5 1.1 1.2 0.6
Dec/1982-Jul/1990 4.3 0.9 0.6 0.4
Apr/1991-Mar/2001 3.6 1.2 0.9 0.6
Dec/2001-Dec/2007 2.8 0.5 0.5 0.3
Jul/2009-Dec/2015 2.1 0.7 0.6 0.4
Historic Average 4.5 1.0 0.8 0.5 Source: BBVA Research & BEA
Contributions to Real GDP Growth, Average of Quarterly Real Growth, SAAR, %
7
Why is Equipment Investment growth weak?
3 Major Single Most Important Problems %
Business Survey on Most Important Problem %
Small businesses in the U.S. consistently reported two areas of concern: fiscal policy and poor sales
5
10
15
20
25
30
35
90 95 00 05 10 15
Govt Requirements
Poor Sales
Taxes
Source: BBVA Research & NFIB
0
10
20
30
40
50
60
70
80
90
100
1980s 1990s 2000s 2010s
Fiscal Business Specific Labor Monetary/Financial Other
8
Why is Equipment Investment growth weak?
Unease with fiscal policy uncertainty is similar across borders and all sizes of firms
0 10 20 30 40 50 60 70 80 90 100
Insufficient Domestic Demand
Insufficient Global Demand
Insufficient Financing
Restricted or Burdensome Regulation
Taxation and Other Costs to Business
Policy and Regulatory Uncertainty
What are the most important factors that may be constraining investment in your country at present, if any?
Very important Important Less Important
Source: BBVA Research & BIAC
2015 The Business and Industry Advisory Committee to the OECD Business Climate Survey, %
9
Why is Equipment Investment growth weak?
Equipment Investment Response Function Real Quarterly, %
Equipment Investment Response Function Real Quarterly, %
Equipment Investment Gross Domestic Product Policy Uncertainty S&P 500
GDP Originated Shock 22.0 55.6 3.1 19.2
S&P Originated Shock 31.4 12.4 0.7 55.5
Policy Uncertainty Shock 49.4 15.3 16.1 19.2
No Schocks 32.6 35.5 5.4 26.5
Equipment Investment Variance Decomposition Equipment Investment, GDP and S&P 500 in real logs, Policy Uncertainty in logs, 1985-2015
0
1
2
3
4
5
6
7
0 5 10 15 20 25 30
GDP Originated Shock
S&P Originated Schok
-0.12
-0.1
-0.08
-0.06
-0.04
-0.02
00 5 10 15 20 25 30
Policy Uncertainty Shock
Equipment Investment is the most sensitive to shocks in aggregate demand, followed by financial market and policy uncertainty
Source: BBVA Research
10
Has recovery been different for GDP and Equipment and Software Investment?
Real Equipment Investment Cycles Normalized, Peak=100, Peak Date= 0
Real GDP Cycles Normalized, Peak=100, Peak Date= 0
The shape of recovery is different for GDP and Equipment Investment: L-shaped vs. U-shaped
90
95
100
105
110
115
120
125
130
135
140
145
-5 0 5 10 15 20 25 30 35 40
19731981199020012007
U-shaped L-shaped
60
80
100
120
140
160
180
200
220
240
0 5 10 15 20 25 30 35 40
197319801981199020012007
Source: BBVA Research
11
Has recovery been different for GDP and Equipment and Software Investment?
Real Transportation Equipment Cycles Normalized, Peak=100, Peak Date= 0
Real Industrial Equipment Cycles Normalized, Peak=100, Peak Date= 0
Industrial Equipment and Transportation Equipment had U-shaped recoveries with growth rates similar to previous cycles
60
70
80
90
100
110
120
130
140
150
160
0 5 10 15 20 25 30 35 40
197319801981199020012007
20
40
60
80
100
120
140
160
180
200
220
0 5 10 15 20 25 30 35 40
197319801981199020012007
Source: BBVA Research
12
Has recovery been different for GDP and Equipment and Software Investment?
Real Information Processing Cycles Normalized, Peak=100, Peak Date= 0
Real Software Investment Cycles Normalized, Peak=100, Peak Date= 0
The last recession and recovery growth have been almost flat for Software and Information Processing Investment
80
120
160
200
240
280
320
360
400
440
480
0 5 10 15 20 25 30 35 40
197319801981199020012007 -10
100
210
320
430
540
60
80
100
120
140
160
180
200
220
240
260
280
0 5 10 15 20 25 30 35 40
1973
1980
1981
2001
2007
1990 (rhs)
Source: BBVA Research
13
Has recovery been different for GDP and Equipment and Software Investment?
Equipment Investment Decomposition: Trend Real, $Billions
Equipment Investment Decomposition: Cycle %
“Plucking Model” estimation reveals evidence of a U-shaped recovery in equipment investment with a return to the long-term trend in 4Q10
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
49
52
56
59
62
66
69
73
76
79
83
86
90
93
97
00
03
07
10
14
Recessions
Cycle0
200
400
600
800
1000
1200
49
52
56
59
63
67
70
74
77
81
85
88
92
95
99
02
06
10
13
Recessions
Trend
plucks
Source: BBVA Research
14
Has recovery been different for GDP and Equipment and Software Investment?
Information Processing Equipment: Trend Real, $Billions
Information Processing Equipment: Cycle %
“Plucking Model” estimation reveals evidence of an L-shaped recovery in Information Processing Investment
-14
-12
-10
-8
-6
-4
-2
0
59
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
07
10
13
Recession
Cycle 0
50
100
150
200
250
300
350
400
59
62
65
68
71
75
78
81
84
87
90
94
97
00
03
06
09
13
Recessions
Trend
Source: BBVA Research
15
Have structural shifts established a “new normal”?
Private Invest Chain Price Index 2009=100
Ratios to Real Nonresidential Fixed Investment %
The Software and Information Processing Investment recovery dynamics should be assessed in conjunction with the long-run change in prices and shares
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
47 52 57 62 67 72 77 82 87 92 97 02 07 12
Info Processing Eqpt
Industrial Equipment
Transportation Equipment
Software
Research & Development
80
90
100
110
120
130
140
150
160
80
130
180
230
280
330
380
430
480
80 85 90 95 00 05 10 15
Info Processing Eqpt
Software
Source: BBVA Research & BEA
16
Have structural shifts established a “new normal”?
Expansions’ Nominal Intellectual Prop. Investment by Industry, Share of Total Intel. Prop. Capital Stock, Private Fixed Assets, Average, %
Expansions’ Nominal Equipment Investment by Industry, Share of Total Equipment Capital Stock, Private Fixed Assets, Average, %
The share of Manufacturing has consistently declined
0 10 20 30
1960s
1970s
1980s
1990s
2000s
2010s
Prof Services
Health
Finance/Insurance
Accomodation
Retail
Mining
Wholesale
Construction
Utilitites
Real Estate
Agriculture
Information
Transportation
Manufacturing
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70
1960s
1970s
1980s
1990s
2000s
2010s
Wholesale
Management
Finance/Insurance
Prof Services
Information
Manufacturing
Source: BBVA Research & BEA
17
Have structural shifts established a “new normal”?
Expansions’ Nominal Equipment Investment by Industry, Share of Total Nondurable Capital Stock, Private Fixed Assets, Average, %
Expansions’ Nominal Equipment Investment by Industry, Share of Total Durable Capital Stock, Private Fixed Assets, Average, %
The lead shares remain unchanged within Nondurable Manufacturing Industries
0 5 10 15 20 25 30 35 40
1960s
1970s
1980s
1990s
2000s
2010s
Elec Eq/Appl/ComponentsWood ProductsOth Transport EqMisc MfgNonmetallic Min ProdMachineryFabr Metal ProdComp/Elec ProdMtr Vhcls/Bod/Trailr/PartsPrimary Metals
0 5 10 15 20 25 30 35 40
1960s
1970s
1980s
1990s
2000s
2010s
Apprl/Leather
Printing & Supply
Textile Mills/TM Prod
Plastics/Rubber Prod
Petroleum/Coal Prod
Paper Prod
Food/Bev/Tob Prod
Chem Prod
Source: BBVA Research & BEA
18
Have structural shifts established a “new normal”?
Expansions’ Nominal Intellectual Property Investment by Industry, Share of Total Finance Capital Stock, Private Fixed Assets, Average, %
Expansions’ Nominal Equipment Investment by Industry, Share of Total Finance Capital Stock, Private Fixed Assets, Average, %
The share of the Finance within industries has increased; Growth is mostly contributed by the Credit Intermediation subsector
0 10 20 30 40 50 60 70 80 90
1960s
1970s
1980s
1990s
2000s
2010s
Funds/Trusts/Oth Fin Vehicles
Sec/Comm Contracts/Invest
Insur Carriers/;Rel Act
Credit Intermed/Rel Act
0 10 20 30 40 50 60
1970s
1980s
1990s
2000s
2010s
Credit Intermed/Rel Act
Sec/Comm Contracts/Invest
Insur Carriers/;Rel Act
Source: BBVA Research & BEA
19
Have structural shifts established a “new normal”?
Expansions’ Nominal Intel. Prop. Investment by Industry, Share of Total Health Care Capital Stock, Private Fixed Assets, Average, %
Expansions’ Nominal Equipment Investment by Industry, Share of Total Health Care Capital Stock, Private Fixed Assets, Average, %
0 10 20 30 40 50 60 70
1960s
1970s
1980s
1990s
2000s
2010sAmbulatoryHealth CareSvcsHospitals
Other
0 10 20 30 40 50 60 70
1980s
1990s
2000s
2010s
Other
Hospitals
AmbulatoryHealth CareSvcs
The share of the Health Care within industries has increased; Growth is mostly contributed by Hospitals
Source: BBVA Research & BEA
20
Have structural shifts established a “new normal”?
Investment: Private Fixed Assets Chained Quantity Index, 2009=100
Investment: Private Fixed Assets $Billions, Chained Quantity Index, 2009=100
The 2014-2015 oil price decline led to a slowdown in Business Investment in the Mining industry
0
5
10
15
20
25
30
35
40
45
0
50
100
150
200
250
50
54
58
62
66
70
74
78
82
86
90
94
98
02
06
10
14
Mining (Real)
Mining (Nominal, rhs)
0
50
100
150
200
250
300
50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10 14
Oil and Gas Extraction
Mining ex Oil and Gas
Support Activites for Mining
Source: BBVA Research & BEA
21
Have structural shifts established a “new normal”?
Expansions Nominal Intellectual Property Investment by Industry, Share of Total Mining Capital Stock, Private Fixed Assets, Average, %
Expansions Nominal Equipment Investment by Industry, Share of Total Mining Capital Stock, Private Fixed Assets, Average, %
0 10 20 30 40 50 60
1960s
1970s
1980s
1990s
2000s
2010sSupport Activites forMiningOil and Gas Extraction
Mining ex Oil and Gas
0 10 20 30 40 50 60 70 80
1980s
1990s
2000s
2010s
Mining ex Oil and Gas
Support Activites for Mining
Oil and Gas Extraction
The share of Support Activity for Mining within the Mining industry’s Equipment Investment has increased
Source: BBVA Research & BEA
22
Key Points The Equipment Investment has returned to its pre-Great Recession long-term trend while gross output has converged to a growth rate below its historic trend
Higher rates of Equipment and Software Investment growth are necessary to boost productivity
Difficult to achieve because:
Manufacturing is losing its lead to the service sector industries as the primary contributor to Equipment and Software expenditures
The industry shares of equipment investment capital stock have become more dispersed as industries with a share below 10% make up 81% of equipment investment in the 2010s expansion
The implementation of measures that increase the long-term economic outlook of potential output can bring the necessary boost to Business Investment
Source: BBVA Research & BEA
23
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Business Investment: Stuck Between Uncertainty and Change Shushanik Papanyan Senior Economist BBVA Research USA
Houston, Texas April 7th, 2016