In the previous post I raised the question of whether we can expect business investment spending to increase fast enough to propel the economy forward through the second half of the year, as Alan Greenspan seems to be arguing. Curious, I thought I’d try to take a rough look at where business spending currently is compared to historical experience. The following chart shows the results of my efforts.
The chart shows two different measures of real (i.e. inflation-adjusted) business spending: all investment spending (the green line), and investment spending excluding residential construction (the blue line). The red dashed line shows the trend growth rate of nonresidential business spending that has held in the US from 1950 to the present.
When the blue line is below the red line, such as the long period of slow economic growth from 1990-1994, business spending is below this historical average. When the blue line is above the red dashed line, such as during the investment boom (some would say bubble) of the late 1990s, business spending is above its historical average.
The relevant thing to note is that right now business investment is right about where we would expect it to be in a period of normal economic growth. It’s certainly possible to argue that business spending can still grow a lot more from here, but that’s tantamount to arguing that we’re about to enter a period of heady economy growth like the late 1990s. I don’t buy it.
Hence I continue to think that Greenspan is being overly optimistic when he says that the economy should resume rapid growth this year. I’m open to evidence that may persuade me otherwise, but right now a bear I’ll remain.