The behavior of the American economy seems to be counter-intuitive. Firms are hiring at record high rates, wages have gone up and Americans are beginning to loosen up their purse strings. In the second quarter of the year, consumption rates went up by 5.5 percent. In spite of all this, the GDP just went up by a measly 1.2 percent last year. The writing on the wall is clear. Business investment has not kept up with the upswing in the economy. As a matter of fact, it has fallen to a record low over the last three quarters. All this begs the question: if consumers are spending and firms are hiring, why are investments weak?
Why are firms reluctant to invest?
The lack of demand for firms’ goods seems to be a driving factor. This explains the restraint of the exporters, considering the fact that global demand has gone down and the dollar has become pricey. However, that does not seem to make sense back home, with consumers spending and firms hiring more than ever.
Tighter credit is another factor. Ever since the Fed raised the interest rates last December, banks have started charging firms more when they borrow money. In spite of the fact that standards have loosened over the last five years, banks have tightened their credit standards more. The financial market turmoil in February led to credit spreads in the bond markets to surge.
The third and the most feasible explanation is that in spite of the strong spending, a slow growth trend has cramped the opportunities for fruitful long term investments. It could be argued that these trends are just a part and parcel of the lengthy fallout from the 2008 recession, which will end soon. Pessimists think that productivity has become a chronic problem. They argue that the technological advances are not as revolutionary as they are made out to be. For instance, they claim that Uber is not as big an advance as the car itself, or that smartphones have not revolutionized the way office work is done the way PCs did. Techno-optimists maintain that there are going to be huge advances in robotics and machine learning.
Although the data seems to support the naysayers, there is no denying the fact that the economy is growing more stable. Businesses that are anticipating slower long term growth can’t be expected to invest much. And politicians cannot bring about technological progress. They can, however, simplify regulation and taxes and invest more in education and infrastructure, all of which will end up raising American productivity.