One of the few bright spots in the dreary economic landscape of the past three years has been business investment. But its strong run may be ending, and that should worry anyone looking for the recovery to finally take off.
Since the economic expansion began in mid-2009, consumers have been holding fast to their wallets, local governments have been slashing spending, and housing has been a wasteland. But business spending on equipment and software rose 8.9 percent in 2010 and 11 percent in 2011.
Yet the rate of growth in such spending has fallen in each of the past three quarters, and it rose at only a 4.8 percent annual rate in the April-June period, according to a data revision on gross domestic product issued Thursday morning. Even more discouraging is a separate report Thursday morning showing that durable-goods orders plummeted at the fastest rate since the financial crisis: 13.2 percent in August, driven by a collapse in aircraft orders. A broader measure of business investment — orders for non-defense capital goods excluding aircraft — rose 1.1 percent, but that followed a much steeper decline, a revised 3.4 percent in July.
So the apparent boom in business investment in 2010 and 2011 may not have been as vigorous as it seemed at first glance. When the recession took hold at the beginning of 2008 and then deepened at year-end and into 2009, businesses slashed their capital-spending budgets to the bone. Need a new computer software package? Make do with the old one for another year. Trucking fleet showing its age? Surely you can get another 20,000 miles out of it.
Those sorts of decisions are the reason business spending on equipment and software was only $885 billion in 2009, down from $1.1 trillion in 2007. (Both numbers are in 2005 dollars to make inflation adjustments unnecessary).
Those gaudy, double-digit percent increases in business spendingin 2010 and 2011 came off that lower base; equipment and software spending hasn’t yet hit 2007 levels again. If, in 2007, spending had simply leveled off and remained unchanged for the ensuing four years, businesses would have spent $449 billion in that time frame — but that didn’t happen. Although housing and consumer behavior gets all the attention in explaining the economic malaise, that is an important part of the picture, too: Nearly half a trillion dollars were “lost” in business spending that would have occurred had the country not slipped into the recession.
The apparent boom of 2010 and 2011, in other words, was more about companies finally getting around to buying that new software package or trucking fleet that they put off in the dark economic days of 2009. Those companies weren’t, it is starting to appear, building new capacity to allow them to ramp up production for a more prosperous future.
Some of that thought process was evident this week as one major U.S. company shared its updated outlook and plans. Peoria, Ill.-based Caterpillar makes heavy construction and mining equipment and sells its goods across the world. With $66 billion in annual revenue, it is one of the bright spots in the American economy, a maker of the kind of sophisticated equipment at which the United States excels. If the United States were to experience an export boom, it would probably be because of companies like Caterpillar.
Speaking at a conference in Las Vegas on Monday, Caterpillar chief executive Doug Oberhelman laid out a dour assessment of the global economic outlook, saying that Caterpillar did not expect a global recession but did see “fairly anemic and modest growth” through 2015.
Against those “anemic” expectations for global growth, what is Caterpillar planning to do in its capital spending? “Acquisitions and capital investment will come down the next two or three, four years, five years,” Oberhelman said.
“Our [capital expenditures], frankly, we’ve slowed a bit of that already,” Oberhelman continued. “We’ve delayed all of our new announcements in China. Our mining business, we’re slowing some of that right now in light of what we’re seeing. Everybody’s kind of snugged up our cap-ex. I would say between now and 2015, we’ll probably be around the same number as 2012 in dollars and come down a bit as a percent of sales.”
It is a story that may become too commonplace in the years ahead. If the soft economic growth of the past two years is to pick up soon, it might fall to other sectors to provide it. Housing, it’s your turn.