The Outlook for Business Fixed Investment

The Outlook for Business Fixed Investment Kevin L. Kliesen Business Economist and Research Officer Federal Reserve Bank of St. Louis

GIC Economic Outlook: First Thoughts on the Coming Decade Federal Reserve Bank of Chicago Chicago, IL June 24, 2019 1

Motivation

• On July 1, the current economic expansion will be the longest on record.

• Will it get there? Most likely, yes, but recession risks appear to have risen.

• Economists look at many variables to gauge the strength or weakness of the economy.

• Two important gauges are labor markets and business fixed investment (CapEx).

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Why Does Investment Matter?

• Rising living standards depend on several factors.

• Worker knowledge (e.g., education) and the invention of new ideas are important.

• Another key factor is the rate of investment per worker, net of depreciation.

• ↑ I → ↑ Productivity → ↑ Real Incomes.

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Disclaimer The views I will express today are my own and do not necessarily reflect the positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

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Business Investment is Volatile and Also Varies with the Strength of the Economy

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Surveys Suggest Some Moderation in Expected Capital Spending.

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Surveys Suggest Some Moderation in Expected Capital Spending.

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A NEW FORWARDLOOKING INDICATOR OF BUSINESS INVESTMENT (Preliminary Research)

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Theories of Business Investment

• Many models of business fixed investment (∆K).

• Accelerator model, Tobin’s q, cash flow • The relative price of K seems to be important,

but not i.

• Others believe that statistical models (e.g., VARs) are the best predictors of ∆K.

• Since Bernanke (1983), the literature abounds with the importance of uncertainty

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One Explanation for Weak Investment: High and Rising Uncertainty

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The Leading Index of CapEx is Highly Correlated with Future Investment

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Longer Term, Forecasters Don’t Expect a Investment Boom

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The Rise of Intangible Investment • The composition of business investment is changing—a smaller share of tangible and a larger share of intangible investment.

• “Capitalism without capital.” (Haskel and Westlake)

• Brynjolfsson, Rock, and Syverson (2018) argue that the rise of general purpose technologies like AI and machine learning require significant complementary investments.

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Categories of Tangible and Intangible Business Investment

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Nominal Business Fixed Investment Shares

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On the Cusp of . . . Something • Rising shares of intangible investment have displaced tangible investment to some extent.

• A rising share of intangible investments potentially has massive implications for society and the economy.

• For society, this includes education policy, intellectual property rights, and “infrastructure.”

• For economists and national income accountants, issues of measurement and 16

QUESTIONS?

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