26/06/17

American workers have done all they can do to grow the economy — now it’s the turn of business

Ordinary Americans have done about all they can do to help the nation’s economy and forestall the next downturn, reports MarketWatch

Since the end of the Great Recession in 2009, millions of Americans have gone back to work or found jobs. They’ve whittled down their debt and got their finances in order. They’ve replaced aging cars in record numbers and many have bought homes to revive a moribund housing market.

That’s good enough to propel the economy along at a 2% rate of growth, but it falls well short of what’s necessary to get the U.S. to expand closer to its 3.3% historic average.

To reach that lofty height, American businesses have to do more. A lot more businesses are doing all right, mind you. Most report healthy profit margins and they are laying off the fewest workers since the early 1970s.

What’s been missing, however, is the secret sauce of a truly vibrant economy: Lots of capital investment.

That’s an accountant’s way of referring to spending on the kind of things that help workers get better at their jobs. Upgraded computers, new tools, improved assembly lines, more training and so forth.

Perhaps the chief reason the current recovery is relatively tepid despite being the third longest in modern times is a low level of business investment. Without more “capex,” companies and their workers can’t increase productivity — the amount of goods and services they produce in an hour of time.

Low productivity is a disease for any economy. Ill effects include lower profits for business, smaller pay raises for workers and less innovation — a vicious cycle that can further depress gains in productivity and keep an economy from reaching its full potential.

In a sense, the U.S. economy is stunted.

After years of weak investment, though, U.S. companies may be ready to step up to the plate. More seem willing to invest, especially in light of efforts by a pro-business Trump administration to cut corporate taxes and regulations.

In the 12 months ended in April, for instance, a key measure of business investment increased by 3%, the highest 12-month rate in two and a half years. And the latest report on durable goods for May, issued Monday, is likely to show an even higher rate of investment in “core” capital goods.

Is it the start of a long-awaited and sustained upturn in investment that propels the economy to new heights? There’s reason to be skeptical.

For one thing, the Trump White House has been unable to push through Congress far-reaching changes in the U.S. health care and tax systems as promised. Executives are optimistic, but cautiously so, and the slow-going in Washington leaves them uncertain about what’s next.

Some economists also argue there’s still too much overcapacity worldwide in manufacturing, agriculture and other key economic sectors to encourage businesses to boost investment.

The Federal Reserve, meanwhile, has embarked on a longer-run effort to raise interest rates and thus increase the cost of borrowing. While rates are still low, businesses have to be more mindful of the Fed.

The nub of matter: Don’t count on businesses coming to the rescue, at least not yet. And don’t count on consumers to do more than they are already doing.

 Most Americans who want jobs can now find one, but wage growth is barely rising faster than inflation and most households aren’t really getting ahead. It’s hard enough for them to scrape up money to replace that aging Civic or Camry and pay for their kids’ college. They’re not going to run up their credit cards at retail outlets and restaurants.

 “It’s difficult to see a major increase in spending by consumers,” said Gus Faucher, chief economist at PNC Financial Services. “It’s certainly not going to be the driver of economic growth like it’s been for the past few years.”