Another Take on This Substandard Recovery

Much economic discussion these days dwells on the substandard nature of this recovery, the historically slow employment gains, the lack of new business formation, the reluctance to take risk in either business or finance. One important sign neglected in these discussions is how inadequate is business spending on new equipment, technology, and productive facilities generally. It barely replaces that lost to daily wear and tear, technological obsolescence, and when price changes destroy the profitability of equipment and procedures, as when fuel cost increases render inefficient vehicles less than profitable. This shortfall raises concerns about the economy’s short- and long-term productive power.

The Commerce Department provides comprehensive depreciation data back only to 1983, but that is time enough to tease out the usual cyclical pattern. In expansions, current capital spending flows typically exceed depreciation rates by 30 to 50 percent. In recessions, that margin typically shrinks. In the mid-1980s, when the economy emerged from the severe recession at the beginning of that decade, gross spending on new capital equipment, premises, and intellectual capital exceeded depreciation by an average of some 44.5 percent. Those rates of spending promoted a healthy expansion in the economy’s overall productive capacity as well as an upgrade that added to the productivity of workers, who consequently had that much more space in which to work, more and better equipment, greater amounts of computing power, and more innovative techniques at their disposal. The recession in the early 1990s dramatically slowed this rate of improvement. Current spending flows in 1991 and 1992 still exceeded depreciation but only by about 22 percent. After the economy picked up in 1993, however, the excess in capital spending over depreciation widened again to 44.3 percent for the rest of the decade, just about the amount averaged in the 1980s.

The pattern changed slightly in the early part of this century. Though the 2001 recession was mild by any standard, business came out of it more cautious than in the prior two decades. No doubt, the cloud of terrorism that rose at the time affected managers’ thinking. In 2003, capital spending flows barely exceeded depreciation by 3.0 percent. As that recovery proceeded, however, business shed much of its fear and spending margins over depreciation again rose significantly. They were, however, not quite as robust as in the 1980s and 1990s. Between 2004 and 2007, spending exceeded depreciation by just about 30 percent, still a handsome enhancement to the nation’s productive facilities, equipment, computing power.

But the great recession of 2008-09 and other weights or economic aggressiveness have changed things radically. In 2009, business was so traumatized that it failed to spend enough even to replace depreciated facilities. In that year’s third quarter, when the recovery was said to have begun, American firms spent 13 percent less for capital goods and technology than actually depreciated. For the year as a whole, actual spending fell 8 percent short of depreciation. In 2010, such spending barely kept up. Even as the recovery became more secure in 2011, or seemingly did, business’ timidity was still apparent. That year, it spent barely 13 percent more on new facilities and intellectual capital than it depreciated, and in 2012 and 2013, it spent barely 20 percent more. What data exists for 2014 is little different. This is a much less robust picture than in the economy’s past.

These outlines are of a piece with the other cyclical comparisons done in this space column and elsewhere. It tells of a traumatized economy, from the legacy of the great recession, as well as the associated financial failures, and from the confusion emanating out of Washington. It also reinforces the conclusion that these retarding forces will change only slowly and that when they do, the economy will be hard pressed to respond immediately.

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