The Outlook for Business Fixed Investment Kevin L. Kliesen Business Economist and Research Officer Federal Reserve Bank of St. Louis
GIC Economic Outlook: First Thoughts on the Coming Decade Federal Reserve Bank of Chicago Chicago, IL June 24, 2019 1
Motivation
• On July 1, the current economic expansion will be the longest on record.
• Will it get there? Most likely, yes, but recession risks appear to have risen.
• Economists look at many variables to gauge the strength or weakness of the economy.
• Two important gauges are labor markets and business fixed investment (CapEx). 2
Why Does Investment Matter?
• Rising living standards depend on several factors.
• Worker knowledge (e.g., education) and the invention of new ideas are important.
• Another key factor is the rate of investment per worker, net of depreciation.
• ↑ I → ↑ Productivity → ↑ Real Incomes. 3
Disclaimer The views I will express today are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.
4
Business Investment is Volatile and Also Varies with the Strength of the Economy
5
Surveys Suggest Some Moderation in Expected Capital Spending.
6
Surveys Suggest Some Moderation in Expected Capital Spending.
7
A NEW FORWARDLOOKING INDICATOR OF BUSINESS INVESTMENT (Preliminary Research)
8
Theories of Business Investment
• Many models of business fixed investment (∆K). • Accelerator model, Tobin’s q, cash flow • The relative price of K seems to be important,
but not i.
• Others believe that statistical models (e.g., VARs) are the best predictors of ∆K.
• Since Bernanke (1983), the literature abounds with the importance of uncertainty
9
One Explanation for Weak Investment: High and Rising Uncertainty
10
The Leading Index of CapEx is Highly Correlated with Future Investment
11
Longer Term, Forecasters Don’t Expect a Investment Boom
12
The Rise of Intangible Investment • The composition of business investment is changing—a smaller share of tangible and a larger share of intangible investment.
• “Capitalism without capital.” (Haskel and Westlake)
• Brynjolfsson, Rock, and Syverson (2018) argue that the rise of general purpose technologies like AI and machine learning require significant complementary investments. 13
Categories of Tangible and Intangible Business Investment
14
Nominal Business Fixed Investment Shares
15
On the Cusp of . . . Something • Rising shares of intangible investment have displaced tangible investment to some extent.
• A rising share of intangible investments potentially has massive implications for society and the economy.
• For society, this includes education policy, intellectual property rights, and “infrastructure.”
• For economists and national income accountants, issues of measurement and 16
QUESTIONS?
17