U.S. Bank: Business Investment Outlook ‘Fairly Muted’
Keith Hembre, chief economist at U.S. Bank, notes in a recently released 2013 Economic and Financial Market Outlook that the economic recovery that began in the third quarter of 2009 is now three and a half years old. During this period, economic growth has occurred in fits and starts, with periods of weakness in 2010, 2011 and 2012 that each resulted in additional monetary or fiscal policy support has come through the Federal Reserve guiding interest rates lower for a more extended period to push long-term yields lower and progressively increasing securities purchases.
These ongoing efforts have generally kept the economy moving forward, but have not produced a more robust expansion. Hembre notes that by most macroeconomic measures, the recovery has been and remains fairly lethargic.
Hebre says whether the slowing in the economy’s growth potential is transitory or longer lasting is very important over the intermediate term, but is not particularly relevant to the 2013 outlook. The economy is nowhere near its productive capacity. Therefore, the economy’s capacity (or the potential growth rate of the economy’s capacity) is unlikely to restrain economic growth next year and beyond. The economy continues to suffer from demand weakness originating both domestically and abroad. We have argued that this weakness is due to the misallocation of resources, particularly in credit markets, during prior expansionary periods. For example, nonfinancial debt obligations as a share of gross domestic product (GDP) are not materially different today than at the onset of the crisis and downturn in the United States and many other developed markets. Hembre notes that the high level of indebtedness will likely continue to restrain demand growth.
Hembre said while housing investment trends have improved, business fixed investment spending has been particularly soft in recent months, slowing from double digit annualized growth rates in mid-2011 to relatively flat activity on average over the past couple of quarters. In part, the recent softness in business spending likely reflects uncertainty over the fiscal outlook for 2013 and beyond. Businesses may have chosen to defer discretionary investments pending more clarity on the policy outlook. There could be some catch up in investment spending following policy outcomes, but there are other factors that explain recent weakness in business spending.
Fundamentally, final demand growth remains very sluggish in the United States and abroad. Slower output growth reduces investment needs and slower sales have resulted in fairly paltry revenue growth for the corporate sector. To maintain profit margins, companies have generally maintained fairly tight cost control. The historical relationship between profit growth and capital expenditures is very similar to the relationship between profit growth and employment. Changes in profit growth on a year-over-year basis have had a leading relationship to capital expenditures. The sharp slowing in profit growth in recent quarters suggests the 2013 outlook for business fixed investment is fairly muted.
To review the entire U.S Bank 2013 Outlook, click here.