Alan Greenspan’s graph of the year: Businesses are (still) holding back on investment

December 30, 2013

Time has its "Person of the Year." Amazon has its books of the year. Pretty Much Amazing has its mixtapes of the year. Buzzfeed has its insane-stories-from-Florida of the year. And Wonkblog, of course, has its graphs of the year. For 2013, we asked some of the year's most interesting, important and influential thinkers to name their favorite graph of the year — and why they chose it. Here's Alan Greenspan's.


Here is Greenspan's explanation:

Private construction has been a major contributor to every recovery out of recession since 1949—except that of 2009. Both nonresidential and, especially, residential construction had important roles in the previous ten recoveries of postwar America. But construction as a share of GDP, after falling sharply in the wake of the economic collapse of 2008, has failed to fully recover since the recession officially ended in the second quarter of 2009. A deep-seated reluctance of business and households to invest in projects with a life expectancy, or durability, of more than twenty years (predominantly buildings) explains virtually all of the weakness in business activity and rise in the unemployment rate following the Lehman Brothers default in September 2008. An economically and politically driven pall of uncertainty has engulfed our markets.

The business community’s willingness to invest in fixed assets more generally is best captured by the proportion of liquid cash flow that nonfinancial corporate businesses choose to commit to difficult-to-liquidate equipment and structures. It is a useful measure of the degree of business confidence about the future. It doesn’t rely on what people say but on what they do. In 2009, that ratio had fallen to the lowest peacetime annual level since 1938. Similarly, the interest rate spread between the U.S. Treasury’s five-year and thirty-year obligations, currently the widest in history, reflects the degree of heightened uncertainty beyond five years and explains why long-lived assets especially have been so heavily discounted and scaled back in recent years.

Fortunately, business investment fears have subsided somewhat since 2009. But heightened economic and political uncertainty continues to plague our economy.

Alan Greenspan was chairman

Greenspan-bookcover
of the Federal Reserve from 1987 to 2006. He is the author of "The Map and the Territory: Risk, Human Nature, and the Future of Forecasting," published in 2013, an exploration of how people predict the economic future and how they can do it better. His previous book was "The Age of Turbulence."

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Lydia DePillis · December 30, 2013