Businesses Are Investing More in 2018, But It’s No Boom
I had been confused by this, but just a few minutes of reading and chart-making made clear that the main thing driving the differing assessments is simply the time frame. If you compare current business capital spending (that is, spending on fixed assets such as equipment, buildings and land)with that of 2017, or 2016, it looks great. If you compare these capex gains with those of past expansions, or even earlier in the current expansion, they look … OK. And given how much cash U.S. corporations suddenly have on their hands thanks to the big tax cuts approved by Congress and signed into law by the president late last year, “OK” is perhaps slightly disappointing.
For some perspective, here’s the history of change in private nonresidential fixed investment, U.S. Bureau of Economic Analysis jargon for capital spending by business, since 1970.
The capital spending recovery over the past few quarters, while solid, hasn’t exactly been setting any records. It’s also worth noting that it came on the heels of a rare nonrecession decline in business capex. The only other such decline since 1970, in 1986 and 1987, probably had something to do with the Tax Reform Act of 1986, which raised business taxes. The 2016 dip was mostly the doing of the domestic oil and gas industry, which was retrenching after big price drops. The oil and gas rebound since then has been a big driver of the recovery in overall business capital expenditure. “Excluding energy and oil investment,” Federal Reserve Bank of Atlanta President Rafael Bostic explained in a speech last month, “investment growth is still below 5 percent on a year-over-year basis — a bit lower than the typical expansion average.”
Capital spending growth is often discussed (and represented by me in the above chart) on a year-over-year basis because the numbers are less volatile that way. Still, the BEA’s standard practice for capex as well as gross domestic product is to report quarter-over-quarter change on an annualized, seasonally adjusted basis, so here’s what that looks like since 1999:
The BEA will release second-quarter capital spending numbers Friday as part of its advance GDP estimate. It will also be making a once-in-five-years revision of past GDP data. These new numbers may make the capital spending story a little clearer. Then again, they may not. Among the Standard & Poor’s 500 Index companies that have reported second-quarter earnings so far, capital spending is up sharply over the same quarter a year ago but not up by much over the first quarter of this year, and it is rising more slowly than it was early in the current expansion.
S&P 500 companies get more than 40 percent of their revenue outside the U.S., which explains some of the differences between this chart and the previous ones. All the charts, though, paint a picture of business capex recovering this year after a period of doldrums, but not exactly booming. The same can be said for the U.S. economy as a whole. Real GDP growth is expected to come in at a strong 4 percent for the second quarter, according to the weighted average of the forecasts tracked by Bloomberg, but be 2.9 percent for the full year, which would mark the 13th consecutive year of sub-3-percent growth.
This does not mean the corporate tax cuts were necessarily a bust. Economic growth will likely be up this year over 2016 and 2017, and the economic effects of the tax legislation will be playing out for years to come. The recent uptick in business investment is a hopeful sign that the now-nine-year-old expansion — the second-longest on record — has some life left in it yet. This capital spending increase just isn’t big or sustained enough (at least not yet) to indicate any kind of major economic takeoff.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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