Friday, April 10, 2015

IMF Direct: No Puzzle about Weak Business Investment

It's pretty obvious that we are getting a lot of conflicting messages out of the IMF and the US Fed. On the one hand there is this stubborn insistence by some Fed members that the US is in recovery and that the Fed needs to start raising interest rates soon. Other Fed members say they need to wait awhile longer to make sure of the recovery. But then we get these kinds of reports like this one on IMF Direct admitting that business investment is weak. If business investment is weak, what does the Fed think will happen if they start raising interest rates? Who knows what is really going to happen in this confused, uncertain, environment. No wonder markets bounce up and down with sharp moves constantly. Below some quotes from this IMF Direct article.


"The debate continues on why businesses aren’t investing more in machinery, equipment and plants. In advanced economies, business investment—the largest component of private investment—has contracted much more since the global financial crisis than after previous recession. And there are worrying signs that this has eroded long-term economic growth."

. . . . .

"Our research, in Chapter 4 of the April 2015 World Economic Outlook, suggests that weak economic activity is the overriding factor holding back business investment. Although it contracted more severely following the crisis than in previous recessions, the contraction in output was also much more severe. The joint behavior of business investment and output has therefore not been unusual.

Using a novel statistical approach that deals with reverse causality running from investment to output, we confirm that business investment has deviated little from what could be expected given the weakness in economic activity (see chart 2). In other words, firms have reacted to weak sales—both current and prospective—by reducing capital spending. Indeed, when businesses are asked about the main challenges facing them, they typically report lack of customer demand as the dominant factor.
Beyond this general pattern, we find pockets of puzzling investment weakness, particularly in euro area countries whose borrowing costs spiked during the 2010-11 sovereign debt crisis. In these countries, financial constraints and policy uncertainty have played an additional role, beyond weak output, in holding back business investment."   . . . . . . 
My added comments:
One has to wonder if those doing this kind of analysis ever take into account all the massive debt that both governments and individual citizens have piled up. It might have something to do with the "pockets of puzzling investment weakness". 

At some point the average US taxpayer who already owes over $150,000 in US government debt on top of individual personal debt of over $150,000 just cannot afford to create any more new "demand". Perhaps people are spending so much time and effort just servicing their existing debt that they can no longer increase consumption enough to create new demand?

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