In a recent post, I noted that actual non-residential fixed capital investment doesn’t show the pattern one would expect based on optimizing models at all. Ugh that sentence was convoluted and so is the post it describes. In fact, the puzzling pattern is really very simple. Non residential fixed capital investment (nrfinv) is high when interest rates are high.
This graph Shows an extremely high ratio of nrfinv to GDP in the late 70s and early 80s, exactly when nominal interest rates were highest. It also shows high investment in the late 90s during the dot com bubble/boom and in the early 20th century at the same time as the even more dramatically high levels of residential investment. In particular, the correlation of nrfinv/gdp and Moody’s index of Baa rated corporate bonds (ibaa) is extremely high 0.77 over the whole sample of available data. Over the period 1947-1995 it is an amazing 0.916.
This correlation is strange for two reasons. First the sign is surprising. Other things equal, one would expect high interest rates to cause low investment. note the brick red curve in the graph is the Federal Funds rate — a policy instrument. Second the interest rates are nominal. Sooner or later, I will try to understand what was going on.
Another question is: why did I just learn about this pattern ? In 1995 the correlation using all available data was over 90%. Why wasn’t this noted even as a puzzling fact ? I can answer this question. I have been playing with nrfinv/gdp and ibaa off and on for months. I have noted positive coefficients on interest rates. I have thought that they have the wrong sign and must be spurious. I am not as respectful of conventional models as most macroeconomists, but I do reflexively avert my eyes from some summary statistics which are too ugly to contemplate.
Here is another version of the graph a couple of FRED commands away from which shows the strange pattern more clearly.