Thursday, April 23, 2015

Disinvestment: Declining US Business Domestic Investment In Excess Of Depreciation

There has been a slow and steady decline in US private domestic business investment in capital (productive business assets) in excess of the investment necessary to undo the negative effects of capital consumption, otherwise known as depreciation, wear and tear, and obsolescence, as shown by the following FRED chart.

The graph shows that over the last 5 plus decades there has been a steady decline in the investment share of incremental (net) private domestic business capital investment in the US.

A slowdown in incremental capital investment negatively impacts growth in employment, productivity and wages.

The graph below shows the quarterly share that net private domestic business investment is of gross private domestic business investment for 1-1-1960 through 10-1-2014. Net investment is derived by subtracting depreciation, wear and tear and obsolescence (capital consumption) from the total (gross) amount of investment. The share amount is derived by dividing net investment by gross investment.


Looking at the above chart, one can see that there has been a steady decline in new, incremental investment in private productive business assets in the US.

The decade averages show this declining trend more clearly.

In the 1960's. the average share of new capital was 42.0 percent.

In the 1970's. the average share of new capital was 38.3 percent.

In the 1980's. the average share of new capital was 31.7 percent.

In the 1990's. the average share of new capital was 27.7 percent.

In the 2000's. the average share of new capital was 19.6 percent.

For 2010-2014, the average share of new capital was 15.5 percent.

For the entire data series period, 1960-2014, the average quarterly share of net private domestic business capital was 30.2 percent of gross (total) private domestic business capital.

Unless there is a reversal of this trend and a long-term increase in private domestic business capital investment, the US economy can expect continued slow wage and employment growth for the foreseeable future.

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