Economy Continues to Slow with Business Investment Down

By at 30 October, 2019, 10:30 am

by Raymond J. Keating-

As President John Adams once said, “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence.” And the stubborn fact is that the U.S. economy has slowed notably over the past two quarters, and generally over the past year, and faltering business investment is a primary reason why.

The latest GDP report from the U.S. Bureau of Economic Analysis notes that real GDP growth in the third quarter of 2019 registered a sluggish 1.9 percent – a slight decline from the underwhelming 2.0 percent in the second quarter. Even with first quarter real growth registering a solid 3.1 percent, add in 1.1 percent growth in the fourth quarter 2018, and over the past year, the real GDP growth rate has averaged only 2 percent. That’s far below the post-World War II average of better than 3 percent (and better than 4 percent during non-recession years).

Source: Federal Reserve Bank of St. Louis, FRED

The big problems continue to be private investment and trade.

Real gross private domestic investment declined by 1.5 percent in the third quarter – the second straight quarter of decline. That included a decline of 3.0 percent in nonresidential fixed investment (i.e., business investment) – again, the second consecutive quarter of decline. Among the three major categories of business investment, structures investment fell by 15.3 percent (second quarterly decline in a row), and equipment investment dropped by 3.8 percent (following on a decline in the second quarter, barely edging forward in the first quarter, and a decline in the fourth quarter of last year). Only intellectual property products investment grew in the third quarter (+6.6 percent), which has remained strong for more than two years now.

Also, after declines in eight of the previous nine quarters, residential investment actually grew in the third quarter 2019 (+5.1 percent).

As for international trade, stagnation and decline continued. Real exports grew by a meager 0.7 percent in the third quarter, after a major decline (-5.7 percent) in the second quarter. Import growth in the third quarter wasn’t much better, with growth of 1.2 percent, which followed no growth in the second quarter and a decline of 1.5 percent in the first quarter.

Meanwhile, personal consumption expenditures grew by 2.9 percent in the third quarter, which was down from 4.6 percent growth in the second quarter but up notably from slow growth in the fourth quarter 2018 and first quarter 2019.

In effect, the consumer accounted for nearly all of the growth in the third quarter. The problem is that the consumer is a follower, and if we see continued decline or sluggishness in business investment, that will affect the consumer.

Whenever the economy suffers, one usually finds one or more problems from government causing, contributing to or magnifying the issues. Right now, the word is “uncertainty.” Uncertainty swirls around trade policy, as well as U.S. foreign policy in general; the future of tax, regulatory and spending policies, especially given the upcoming 2020 elections; along with the quality and independence of Federal Reserve decisions on monetary policy. All of these factors create questions and doubts for businesses, entrepreneurs and investors, which in turn, obviously, have very real effects on economic growth.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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