August 01, 2003

Business Investment in Equipment

A durable, high productivity-growth, fast output growth recovery is unlikely without a boom in business investment. But so far business investment has been painfully, painfully slow to turn around:

Posted by DeLong at August 1, 2003 11:48 AM | TrackBack

Comments

This business may be distinctive in the amount of business investment that is going abroad, especially to China and India. If global output capacity is considered there is little reason for a sharp increase in business investment in America.

Posted by: anne on August 1, 2003 12:28 PM

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A durable, high productivity-growth, fast output growth recovery is unlikely without a boom in business investment.

Colour me confused. I'd have figured that until global demand picks up, given current conditions of spare capacity, that new business investing is going nowhere fast. In the current conditions I fail to see how business investing would help unless demand picked up first?

Posted by: Lorenzo on August 1, 2003 12:53 PM

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I have been following the BEA quarterly releases of business investment for the past couple of years noting the same thing. But the chart was an excellent device. Well done!

Posted by: Hal McClure on August 1, 2003 01:07 PM

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"This business may be distinctive in the amount of business investment that is going abroad, especially to China..."
~~~

Another view on China...

"Americans seem to be fixating these days on the idea of China stealing away American jobs. That's interesting because fear of China among its developing-country neighbors, who had much more plausible reasons to worry about the impact of this rising competitor in the same economic niches, has peaked and started to fade. Instead, Asians seem to have realized that not only is the China threat overrated, but the country is an engine of growth that benefits them...

"In fact, U.S. and Chinese economic interests are quite closely aligned, because the two economies are so complementary. You might even say that China is an economic colony of the U.S., with its currency so tightly pegged to the dollar and American companies using it as a base for their low-cost manufacturing.

"That might seem like a strange idea given how nationalistic the Beijing regime is. But consider the government's actual behavior, and it's not hard to imagine that if Paul Bremer were running China instead of Hu Jintao, he'd be accused of exploiting the country's economy to benefit the U.S. and other Western countries.

"First of all, the most productive sector of the economy is largely run by foreigners, for the benefit of foreigners. China may boast of being the largest recipient of foreign direct investment in the world, but it got that way in part by offering preferential tax treatment and other incentives to multinational companies. Those ventures in turn export not only their products, but also their profits, often hidden by manipulating the prices used for transactions within the companies.

"The Chinese government, meanwhile, has been burning through its people's savings like an Internet company, to provide employment to hundreds of millions of workers [by subsidizing unproductive money-losing state-owned industries]....

"So China is using the hard-earned savings of its people, which could have been devoted to building globally competitive companies, and is instead throwing them down 100,000 state-owned ratholes so that Chinese workers can produce artificially cheap products for American consumers to enjoy. The government is even taking away the dollars earned by selling these products and loaning them back to the U.S. at low rates so that those American consumers can keep on buying.

"There's still time for China to get wise. But the point here is that Americans should be sanguine about China's development model. Thanks to Beijing's own policies, China is giving them cheap capital, cheap manufactured goods sold below their true cost and a market for sophisticated, high value-added goods.

"At the end of the day, China will be left with uncompetitive companies, depleted savings and a balance-sheet recession. It will have to sell off the distressed assets of its failed banking system, at which point Western companies can buy up even more of the economy at fire-sale prices..."

Hugo Restall, editorial page editor of The Asian Wall Street Journal
http://online.wsj.com/article/0,,SB10596903491231600,00.html?mod=opinion

Posted by: Jim Glass on August 1, 2003 01:51 PM

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"First of all, the most productive sector of the economy is largely run by foreigners, for the benefit of foreigners."

Correction: is run for the short-term benefit of foreigners and the long-term benefit of Chinese. The JV model of economic development is calculated not to enrich the treasury (although it does that), but to enrich the national talent pool. The logic is that the fastest way to overcome the development gap between China and developed countries, is to have the developed countries come and pay to train large numbers of Chinese workers and managers how to meet the requirements of developed economies. China's inexorable climb up the value chain over the last fifteen years shows this policy has been overwhelmingly successful.

"It will have to sell off the distressed assets of its failed banking system"

U.S. treasuries and mortgage-backed securities? Even the most bearish bears aren't characterizing those as "distressed assets" yet.

As for the other "distressed assets", they're being shuffled off into asset management corporations for restructuring or liquidation.
E.g.: http://www.cindamc.com/

Posted by: Michael Robinson on August 1, 2003 09:16 PM

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Actually I find it pretty amazing that current investment in IT equipment and software is already higher, in real terms, than it was at the craziest height of the boom!

Posted by: Neville Fridge on August 1, 2003 09:21 PM

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Off-topic: Berkeley nobel laureate economist sez, "Bush administration worst U.S. government ever."

http://www.commondreams.org/headlines03/0729-06.htm

Posted by: Michael Robinson on August 1, 2003 10:11 PM

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>>Actually I find it pretty amazing that current investment in IT equipment and software is already higher, in real terms, than it was at the craziest height of the boom!<<

Yes. High-tech revenues are lower (things are a lot cheaper). But more stuff is being bought--a lot more stuff, if one excepts telecom, which is still depressed...

Posted by: Brad DeLong on August 2, 2003 07:37 AM

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Foreign investment in China and India does not displease me, rather it tells me that capacity is growing globally and there is less need than we might suppose for American domestic capacity investment. Also, it tells me job losses may need to be offset in creative ways since even a long hoped for demand increase may not result in enough job creation for a long time.

Development in China and India pleases me, but presents structual problems.

Brad DeLong has often pointed out that investment in high technology equipment and software has been robust from 2000 till now. Price reductions have meant that revenue growth for tech companies has been far slower than stock prices suggested in 2000.

Posted by: anne on August 2, 2003 09:17 AM

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Perhaps I'm in the throws of innumeracy, but it sure looks to me that the slope of the last two years of the bottom plot indicates that "Information Processing Equipment and Software" has turned around, with "Equipment and Software" not too far behind.

Posted by: Russell L. Carter on August 2, 2003 09:41 AM

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Gack! 'throes', not 'throws'. I'm illiterate too! After I wrote the draft I went to dictionary.com, got interested in the etymology of 'throes', and forgot about the reason I went there in the first place. The internet is just too engrossing.

Posted by: Russell L. Carter on August 2, 2003 09:47 AM

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IT spending is growing, but is the growth rate nearly high enough to suuport what seem to be extreme price/earning ratios for IT companies? Forget "seem." P/E ratios of NASDAQ IT stocks are as extreme as in 2000. Can they be justified this time?

Posted by: bill on August 2, 2003 10:28 AM

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I was just wondering about how business investment in equipment and software is measured. What happens when a company decides to download an open source program like OpenOffice instead of buying ("investing") in a commercial alternative like Microsoft Office ? Comparing IT spending in different countries seems like a daunting task because software is often pirated in less developed countries and/or open source programs may be more popular in other countries.

Posted by: Nescio on August 2, 2003 01:37 PM

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"...so far business investment has been painfully, painfully slow to turn around."

Personally I find it amazing that Information Processing Equipment and Software is already selling faster than it was at the craziest height of the boom, which is what this chart appears to show.

Posted by: NF on August 4, 2003 08:17 PM

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Posted by: casino bonus on December 20, 2003 11:11 PM

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Foreign investment in China and India does not displease me, rather it tells me that capacity is growing globally and there is less need than we might suppose for American domestic capacity investment. Also, it tells me job losses may need to be offset in creative ways since even a long hoped for demand increase may not result in enough job creation for a long time.

Development in China and India pleases me, but presents structual problems.

Brad DeLong has often pointed out that investment in high technology equipment and software has been robust from 2000 till now. Price reductions have meant that revenue growth for tech companies has been far slower than stock prices suggested in 2000.

Posted by: dsl on January 8, 2004 03:27 PM

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