ECONOMY: GDP Growth Lags Because Business Investment Lags

By at 28 February, 2020, 8:35 am

by Raymond J. Keating-

The U.S. Bureau of Economic Analysis released its second estimate on fourth quarter 2019 gross domestic product (GDP). The real GDP growth rate remained unchanged from the first estimate at a lackluster 2.1 percent, with the 2.3 percent growth rate for all of 2019 – slowest since 2016 – also unchanged.

The only notable change in this second estimate was a downgrade of an already poor number on private fixed nonresidential (i.e., business) investment. That was downgraded from -1.5 percent in the fourth quarter to -2.3 percent.

The latest report of durable goods from the U.S. Census Bureau also didn’t point to any serious reversal. The topline noted that new orders of durable goods declined in January (-0.2 percent), marking the second decline in the last three months. Focusing in on nondefense capital goods excluding aircraft orders, which offers a gauge of private investment in equipment and software, new orders in January grew by 1.1 percent, following on a decline of 0.5 percent in December and no growth in November. This growth in January obviously is welcome, and one can hope that this will last and accelerate in coming months. The economy clearly needs it.

Indeed, poor business investment has been a key factor (along with a falloff in entrepreneurship) for slow growth in the U.S. for a dozen years now. Consider some key points:

• Since 1950, real U.S. GDP growth has averaged 3.3 percent, and from 1950 to 2007 (prior to the Great Recession), growth averaged 3.6 percent. From 2008 to 2019, real growth averaged a mere 1.7 percent. If we just consider the post-Great Recession period, from mid-2009 to 2019, real growth averaged 2.3 percent.

• However, it must be kept in mind that the long-term growth rates since 1950 cited here include recessions. If we factor out recessions, real GDP growth during recovery/expansion periods averaged 4.4 percent up to the last recession. So, the 2.3 percent average growth rate since mid-2009 is nearly half as fast as the economy should be growing.

• If we then turn to private real fixed nonresidential investment – or business investment – we see that growth has averaged 5.0 percent since 1950, and the average registered 5.5 percent from 1950 to 2007. From 2008 to 2019, the average rate of growth came in at 2.8 percent. And if we look at the post-recession period, from mid-2009 to 2019, growth averaged 4.8 percent.

• However, not only does that 4.8 percent rate of growth fall short of the overall average, but it comes up woefully short when compared to the 7.3 percent average rate of growth in business investment during recovery/expansion periods from 1950 up to the last recession.

For 12 years now, the U.S. has suffered from underwhelming levels of business investment, including during this current recovery/expansion period that started in mid-2009. Sluggish business investment means slower economic growth now and in the future, given that investment drives productivity growth and is the seed for future economic growth.

Since the Great Recession, business investment has faced assorted policy obstacles, including hyper-regulation and higher taxes during the Obama years; increased risks and uncertainties on the trade front during the Trump years; and periods of large increases in government spending since 2007. Some regulatory and tax relief during the Trump years has been most welcome, but more is needed, such as expanding and making permanent pro-entrepreneurship, pro-investment tax reductions; further regulatory relief; government spending restraint; and a return of the U.S. to global leadership in advancing free trade.

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


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