business investment: stuck between uncertainty and …€¦ · business investment: stuck between...

Business Investment: Stuck Between Uncertainty and Change Shushanik Papanyan Senior Economist BBVA Research USA

Houston, Texas April 7th, 2016

2

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Business Investment: Stuck Between Uncertainty and Change

The depth of decline in aggregate demand during the Great Recession coupled with the subsequent slow recovery are the most common factors cited as the cause of weakness in business investment. Alternative factors to consider for the weak growth rate in business investment are policy uncertainty and financial market volatility.

When compared to past economic expansions the current expansion appears much weaker in terms of output growth than it does for business investment. The expansion-by-expansion capital stock analysis highlight that the U.S. has been undergoing long-term and sizable structural shifts in the economy’s industry make-up.

Going forward, focusing on the broader weaknesses in economic activity could boost potential output and consequently encourage higher business investment.

Please join us for an informative discussion with Dr. Papanyan

Shushanik Papanyan, Ph.D. Senior Economist, BBVA Research USA [email protected] www.bbvaresearch.com

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3

Elusive Growth in Business Investment

The Great Recession hit hard both aggregate output and investment; furthermore recovery growth rates have been weak, having a bearing on productivity and long-term economic growth prospects Equipment and software investment is a predominantly productive contributor to productivity and economic growth Firms hold off business investing when aggregate

demand is weak Weak business investment leads to weak output growth

4

Elusive Growth in Business Investment

Why is Equipment Investment growth weak?

Policy Uncertainty Aggregate demand Financial Markets

Has the post-Great Recession recovery been different for GDP than for Equipment and Software Investment? Have structural shifts within industry shares established a “new normal” for Equipment and Software Investment growth?

5

Elusive growth in Business Investment

Severe decline in both GDP and Investment during the Great Recession

Recessions Gross Domestic

Product Fixed Investment

Nonresidential Fixed Investment

Equipment Investment

Dec/1948-Oct/1949 -1.4 -0.8 -1.4 -1.1

Aug/1953-May/1954 -2.4 0.0 -0.2 -0.4

Sep/1957-Apr/1958 -3.8 -2.0 -1.7 -1.5

May/1960-Feb/1961 -0.4 -0.6 -0.5 -0.8

Jan/1970-Nov/1970 -0.1 -0.2 -0.5 -0.4

Dec/1973-Mar/1975 -2.5 -2.1 -0.9 -0.6

Feb/1980-Jul/1980 -4.3 -2.8 -1.2 -1.0

Aug/1981-Nov/1982 -2.0 -1.3 -0.9 -0.7

Aug/1990-Mar/1991 -2.7 -1.7 -0.9 -0.6

Apr/2001-Nov/2001 0.6 -1.1 -1.2 -0.7

Jan/2008-Jun/2009 -2.8 -2.6 -1.6 -1.2

Historic Average -2.0 -1.4 -1.0 -0.8

Source: BBVA Research & BEA

Contributions to Real GDP Growth, Average of Quarterly Real Growth, SAAR, %

6

Elusive growth in Business Investment Anemic post-Great Recession recovery in GDP but not as much in

Business and Equipment Investment

Expansions Gross Domestic

Product Fixed Investment

Nonresidential Fixed Investment

Equipment Investment

Nov/1949-Jul/1953 7.8 1.0 0.8 0.4

Jun/1954-Aug/1957 4.1 0.8 0.7 0.4

May/1958-Apr/1960 5.7 1.3 0.8 0.6

Mar/1961-Dec/1969 4.9 1.0 0.8 0.5

Dec/1970-Nov/1973 5.1 1.4 1.0 0.8

Apr/1975-Jan/1980 4.3 1.4 1.0 0.6

Aug/1980-Jul/1981 4.5 1.1 1.2 0.6

Dec/1982-Jul/1990 4.3 0.9 0.6 0.4

Apr/1991-Mar/2001 3.6 1.2 0.9 0.6

Dec/2001-Dec/2007 2.8 0.5 0.5 0.3

Jul/2009-Dec/2015 2.1 0.7 0.6 0.4

Historic Average 4.5 1.0 0.8 0.5 Source: BBVA Research & BEA

Contributions to Real GDP Growth, Average of Quarterly Real Growth, SAAR, %

7


3 Major Single Most Important Problems %

Business Survey on Most Important Problem %

Small businesses in the U.S. consistently reported two areas of concern: fiscal policy and poor sales

5

10

15

20

25

30

35

90 95 00 05 10 15

Govt Requirements

Poor Sales

Taxes

Source: BBVA Research & NFIB

0

10

20

30

40

50

60

70

80

90

100

1980s 1990s 2000s 2010s

Fiscal Business Specific Labor Monetary/Financial Other

8


Unease with fiscal policy uncertainty is similar across borders and all sizes of firms

0 10 20 30 40 50 60 70 80 90 100

Insufficient Domestic Demand

Insufficient Global Demand

Insufficient Financing

Restricted or Burdensome Regulation

Taxation and Other Costs to Business

Policy and Regulatory Uncertainty

What are the most important factors that may be constraining investment in your country at present, if any?

Very important Important Less Important

Source: BBVA Research & BIAC

2015 The Business and Industry Advisory Committee to the OECD Business Climate Survey, %

9


Equipment Investment Response Function Real Quarterly, %

Equipment Investment Response Function Real Quarterly, %

Equipment Investment Gross Domestic Product Policy Uncertainty S&P 500

GDP Originated Shock 22.0 55.6 3.1 19.2

S&P Originated Shock 31.4 12.4 0.7 55.5

Policy Uncertainty Shock 49.4 15.3 16.1 19.2

No Schocks 32.6 35.5 5.4 26.5

Equipment Investment Variance Decomposition Equipment Investment, GDP and S&P 500 in real logs, Policy Uncertainty in logs, 1985-2015

0

1

2

3

4

5

6

7

0 5 10 15 20 25 30

GDP Originated Shock

S&P Originated Schok

-0.12

-0.1

-0.08

-0.06

-0.04

-0.02

00 5 10 15 20 25 30

Policy Uncertainty Shock

Equipment Investment is the most sensitive to shocks in aggregate demand, followed by financial market and policy uncertainty

Source: BBVA Research

10

Has recovery been different for GDP and Equipment and Software Investment?

Real Equipment Investment Cycles Normalized, Peak=100, Peak Date= 0

Real GDP Cycles Normalized, Peak=100, Peak Date= 0

The shape of recovery is different for GDP and Equipment Investment: L-shaped vs. U-shaped

90

95

100

105

110

115

120

125

130

135

140

145

-5 0 5 10 15 20 25 30 35 40

19731981199020012007

U-shaped L-shaped

60

80

100

120

140

160

180

200

220

240

0 5 10 15 20 25 30 35 40

197319801981199020012007


11


Real Transportation Equipment Cycles Normalized, Peak=100, Peak Date= 0

Real Industrial Equipment Cycles Normalized, Peak=100, Peak Date= 0

Industrial Equipment and Transportation Equipment had U-shaped recoveries with growth rates similar to previous cycles

60

70

80

90

100

110

120

130

140

150

160

0 5 10 15 20 25 30 35 40

197319801981199020012007

20

40

60

80

100

120

140

160

180

200

220

0 5 10 15 20 25 30 35 40

197319801981199020012007


12


Real Information Processing Cycles Normalized, Peak=100, Peak Date= 0

Real Software Investment Cycles Normalized, Peak=100, Peak Date= 0

The last recession and recovery growth have been almost flat for Software and Information Processing Investment

80

120

160

200

240

280

320

360

400

440

480

0 5 10 15 20 25 30 35 40

197319801981199020012007 -10

100

210

320

430

540

60

80

100

120

140

160

180

200

220

240

260

280

0 5 10 15 20 25 30 35 40

1973

1980

1981

2001

2007

1990 (rhs)


13


Equipment Investment Decomposition: Trend Real, $Billions

Equipment Investment Decomposition: Cycle %

“Plucking Model” estimation reveals evidence of a U-shaped recovery in equipment investment with a return to the long-term trend in 4Q10

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

49

52

56

59

62

66

69

73

76

79

83

86

90

93

97

00

03

07

10

14

Recessions

Cycle0

200

400

600

800

1000

1200

49

52

56

59

63

67

70

74

77

81

85

88

92

95

99

02

06

10

13

Recessions

Trend

plucks


14


Information Processing Equipment: Trend Real, $Billions

Information Processing Equipment: Cycle %

“Plucking Model” estimation reveals evidence of an L-shaped recovery in Information Processing Investment

-14

-12

-10

-8

-6

-4

-2

0

59

62

65

68

71

74

77

80

83

86

89

92

95

98

01

04

07

10

13

Recession

Cycle 0

50

100

150

200

250

300

350

400

59

62

65

68

71

75

78

81

84

87

90

94

97

00

03

06

09

13

Recessions

Trend


15

Have structural shifts established a “new normal”?

Private Invest Chain Price Index 2009=100

Ratios to Real Nonresidential Fixed Investment %

The Software and Information Processing Investment recovery dynamics should be assessed in conjunction with the long-run change in prices and shares

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

47 52 57 62 67 72 77 82 87 92 97 02 07 12

Info Processing Eqpt

Industrial Equipment

Transportation Equipment

Software

Research & Development

80

90

100

110

120

130

140

150

160

80

130

180

230

280

330

380

430

480

80 85 90 95 00 05 10 15

Info Processing Eqpt

Software


16


Expansions’ Nominal Intellectual Prop. Investment by Industry, Share of Total Intel. Prop. Capital Stock, Private Fixed Assets, Average, %

Expansions’ Nominal Equipment Investment by Industry, Share of Total Equipment Capital Stock, Private Fixed Assets, Average, %

The share of Manufacturing has consistently declined

0 10 20 30

1960s

1970s

1980s

1990s

2000s

2010s

Prof Services

Health

Finance/Insurance

Accomodation

Retail

Mining

Wholesale

Construction

Utilitites

Real Estate

Agriculture

Information

Transportation

Manufacturing

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70

1960s

1970s

1980s

1990s

2000s

2010s

Wholesale

Management

Finance/Insurance

Prof Services

Information

Manufacturing


17


Expansions’ Nominal Equipment Investment by Industry, Share of Total Nondurable Capital Stock, Private Fixed Assets, Average, %

Expansions’ Nominal Equipment Investment by Industry, Share of Total Durable Capital Stock, Private Fixed Assets, Average, %

The lead shares remain unchanged within Nondurable Manufacturing Industries

0 5 10 15 20 25 30 35 40

1960s

1970s

1980s

1990s

2000s

2010s

Elec Eq/Appl/ComponentsWood ProductsOth Transport EqMisc MfgNonmetallic Min ProdMachineryFabr Metal ProdComp/Elec ProdMtr Vhcls/Bod/Trailr/PartsPrimary Metals

0 5 10 15 20 25 30 35 40

1960s

1970s

1980s

1990s

2000s

2010s

Apprl/Leather

Printing & Supply

Textile Mills/TM Prod

Plastics/Rubber Prod

Petroleum/Coal Prod

Paper Prod

Food/Bev/Tob Prod

Chem Prod


18


Expansions’ Nominal Intellectual Property Investment by Industry, Share of Total Finance Capital Stock, Private Fixed Assets, Average, %

Expansions’ Nominal Equipment Investment by Industry, Share of Total Finance Capital Stock, Private Fixed Assets, Average, %

The share of the Finance within industries has increased; Growth is mostly contributed by the Credit Intermediation subsector

0 10 20 30 40 50 60 70 80 90

1960s

1970s

1980s

1990s

2000s

2010s

Funds/Trusts/Oth Fin Vehicles

Sec/Comm Contracts/Invest

Insur Carriers/;Rel Act

Credit Intermed/Rel Act

0 10 20 30 40 50 60

1970s

1980s

1990s

2000s

2010s

Credit Intermed/Rel Act

Sec/Comm Contracts/Invest

Insur Carriers/;Rel Act


19


Expansions’ Nominal Intel. Prop. Investment by Industry, Share of Total Health Care Capital Stock, Private Fixed Assets, Average, %

Expansions’ Nominal Equipment Investment by Industry, Share of Total Health Care Capital Stock, Private Fixed Assets, Average, %

0 10 20 30 40 50 60 70

1960s

1970s

1980s

1990s

2000s

2010sAmbulatoryHealth CareSvcsHospitals

Other

0 10 20 30 40 50 60 70

1980s

1990s

2000s

2010s

Other

Hospitals

AmbulatoryHealth CareSvcs

The share of the Health Care within industries has increased; Growth is mostly contributed by Hospitals


20


Investment: Private Fixed Assets Chained Quantity Index, 2009=100

Investment: Private Fixed Assets $Billions, Chained Quantity Index, 2009=100

The 2014-2015 oil price decline led to a slowdown in Business Investment in the Mining industry

0

5

10

15

20

25

30

35

40

45

0

50

100

150

200

250

50

54

58

62

66

70

74

78

82

86

90

94

98

02

06

10

14

Mining (Real)

Mining (Nominal, rhs)

0

50

100

150

200

250

300

50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10 14

Oil and Gas Extraction

Mining ex Oil and Gas

Support Activites for Mining


21


Expansions Nominal Intellectual Property Investment by Industry, Share of Total Mining Capital Stock, Private Fixed Assets, Average, %

Expansions Nominal Equipment Investment by Industry, Share of Total Mining Capital Stock, Private Fixed Assets, Average, %

0 10 20 30 40 50 60

1960s

1970s

1980s

1990s

2000s

2010sSupport Activites forMiningOil and Gas Extraction


0 10 20 30 40 50 60 70 80

1980s

1990s

2000s

2010s


Support Activites for Mining

Oil and Gas Extraction

The share of Support Activity for Mining within the Mining industry’s Equipment Investment has increased


22

Key Points The Equipment Investment has returned to its pre-Great Recession long-term trend while gross output has converged to a growth rate below its historic trend

Higher rates of Equipment and Software Investment growth are necessary to boost productivity

Difficult to achieve because:

Manufacturing is losing its lead to the service sector industries as the primary contributor to Equipment and Software expenditures

The industry shares of equipment investment capital stock have become more dispersed as industries with a share below 10% make up 81% of equipment investment in the 2010s expansion

The implementation of measures that increase the long-term economic outlook of potential output can bring the necessary boost to Business Investment


23

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Business Investment: Stuck Between Uncertainty and Change Shushanik Papanyan Senior Economist BBVA Research USA

Houston, Texas April 7th, 2016

business investment: stuck between uncertainty and …€¦ · business investment: stuck between...

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