Wednesday, May 9, 2012

Real Investment Back To Lower 1993 Trend Level: Portends Lower US Productivity And Economic Growth

From Federal Reserve Bank Of Cleveland, Economic Trends, "A Return to Lower Levels of Investment Activity" by Margaret Jacobson and Filippo Occhino:
After growing 3.46 percent on average during the 1970s and 1980s (more precisely, between the peaks of the 1969–1970 and 1990–1991 cycles), investment accelerated during the 1990s and remained elevated until the 2007 recession. Between 1995 and 2007, investment exceeded the level consistent with a 3.46 percent constant growth rate by about 20 percent to 40 percent. Relative to real GDP, investment measured in real terms rose from 12 percent to record-high levels above 17 percent. Several factors contributed to this period of high investment activity, including the introduction and spread of new information and communication technologies, which raised the productivity and return of investment; the steep decline of the relative cost of investment goods; and the greater supply of funds made available by the larger flow of foreign capital entering the U.S.

The higher level of investment had a positive impact on aggregate demand and economic activity. And by deepening the capital stock, it raised labor productivity and economic growth. After averaging 1.6 percent between 1987 and 1995, productivity growth accelerated to 2.6 percent. Of this productivity acceleration, capital deepening was a major contributor, raising the growth of labor productivity by about 0.6 percentage points during 1995–2010 relative to the previous 1987–1995 period.

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