Global acceleration watch: US business investment
Simon Ward
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US business investment fell by 0.5% in the year to the second quarter but is expected here to rebound during the second half and into 2017, contributing to a rise in GDP growth. Recent evidence is consistent with this forecast.
Reasons for expecting investment to strengthen include: corporate profits have recovered since late 2015; corporate bond yields have fallen significantly; capacity utilisation is little changed despite sluggish growth; money holdings of non-financial businesses are rising solidly (by 5.8% in the year to June); the corporate liquidity ratio (i.e. liquid assets divided by short-term liabilities) is above its historical average; so is Tobin’s Q ratio (i.e. the market value of equity is high relative to the replacement cost of assets, implying an incentive to invest); and capital spending cuts in the energy sector have ended.
Equipment spending accounts for 46% of business investment. Industrial output of business equipment rose in the second quarter and was stable in the third quarter. This increase suggests that next week’s third-quarter GDP release will report a recovery in equipment spending following three quarterly falls – see first chart.
Structures investment accounts for a further 21% of the business total and has been depressed by a collapse in mining exploration. The industrial output component covering oil and gas well drilling, however, rose in the third quarter, suggesting that mining and overall structures investment returned to growth – second chart.
Spending on “intellectual property products”, mainly software and R&D, accounts for the remaining 33% of business investment. It rose by 4.8% in the year to the second quarter and is likely to have continued to grow strongly in the third.
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