Monday, October 03, 2011

The Sub-Par "Investment-Less" Recovery

From today's Enterprise Blog:

The chart above helps to illustrate the current economic situation by showing the percent changes since the third quarter of 2007 for five key economic variables: real personal consumption spending, real disposable personal income, real GDP, private payroll employment, and real business investment. As can be seen in the chart, consumption, income, and production have all recovered from the effects of the Great Recession and are now back to their pre-recession levels. But private employment remains almost 6 percent and more than 6 million jobs below the pre-recession level, and that’s associated with private business investment that remains 10 percent below 2007 levels.

Bottom Line: Private job creation and private business investment are so closely linked that the current “jobless recovery” could also be described as an “investment-less recovery.” The chart above helps to show that it’s not a lack of consumer spending, weak gains in personal income, or sluggish real output growth that are holding back job creation. Rather, it’s weak business investment spending that is largely responsible for the sub-par recovery.

The attempts to jump-start the economy with fiscal and monetary stimulus haven’t brought the jobs back because they haven’t created the right incentives to bring private business investment spending back to a level that would restore jobs to pre-recession levels. If we could focus instead on removing the many political and regulatory uncertainties that are holding back private business investment, risk-taking, and entrepreneurship, only then will the “investment-less recovery” end.  And when it ends, strong job creation will automatically follow and then the "jobless recovery" will end.

Related: "As is well known, large companies have $2 trillion of cash and securities, up $520 billion since year-end 2007. That's money firms could use to hire and invest in plants or new products — if managers were more confident. Instead, they're stockpiling funds against another financial crisis."

~Robert Samuelson's article "Risk Aversion Has Economy Frozen Stiff"

Update: In response to some of the comments, the chart below shows that real personal consumption expenditures are about 1% above the re-recession level.  


26 Comments:

At 10/03/2011 7:05 PM, Blogger Rufus II said...

First, you have to understand that virually All new job creation is from "Start-ups."

Not from Large Businesses. Not from Medium-sized Businesses, not even from "Small Businesses." From Start-ups.

Start-ups are funded, usually, by a Loan on the House.

See the Problem?

 
At 10/03/2011 7:22 PM, Blogger PeakTrader said...

Deregulation lowers costs and prices, to increase demand.

However, when the recession began, demand fell below supply, i.e. there was excess supply.

Over the past four years, productivity increased, while demand was flat.

So, the demand wasn't there to expand supply.

 
At 10/03/2011 7:31 PM, Blogger Don said...

"...That's money firms could use to hire and invest in plants or new products — if managers were more confident. ..."

While plants and new product investments can be helped by the mere availability of money or credit, hiring requires an ongoing visibility of profitable employment in the future for most steady employees. No matter much money you have, you wouldn't hire a permanent employee unless what they can produce has a greater value than their cost.

Regards, Don

 
At 10/03/2011 7:50 PM, Blogger Craig said...

So, the demand wasn't there to expand supply.

How could there be when 10% of the labor force (or more) was unemployed? People have to work to exert demand. Even if the government were able to make up for the lost wages of the 10%, it won't demand what they would have.

It's a formula for an expensive failure.

 
At 10/03/2011 8:10 PM, Blogger PeakTrader said...

Craig, an expensive failure is expanding your store when you don't have any customers.

Also, you state "people have to work to exert demand."

That's a false assumption. Demand exists through autonomous consumption.

The government can spur demand through tax cuts or cash benefits for the unemployed.

 
At 10/03/2011 8:21 PM, Blogger Marko said...

So this chart shows that supply siders were right all along - there is no shortage of demand, there is a problem on the supply side so we should permanently cut marginal tax rates.

 
At 10/03/2011 8:31 PM, Blogger marmico said...

Break business investment into its three components.

1. Equipment & software.
2. Nonresidential structures.
3. Residential structures.

Forget residential structures. Investment in equipment & software has almost recovered to its prior peak and in a faster time frame than the 2001 recession. Investment in structures, particularly offices and malls seem to be lagging.

If we could focus instead on removing the many political and regulatory uncertainties that are holding back private business investment [in offices and malls], risk-taking, and entrepreneurship, only then will the “investment-less recovery” end.

Just what the supply-siders predict. Higher vacancy rates in offices and malls.

 
At 10/03/2011 8:47 PM, Blogger marmico said...

Ooops, 'da chart.

 
At 10/03/2011 9:29 PM, Blogger Hydra said...

Let's see. Business wont go to work unless government gives them free reign to do as they please, because businessmen are afraid they won't earn enough to stay alive.

Sounds like the same complaint as labor: why should I labor when it won't make me a living?

 
At 10/03/2011 11:18 PM, Blogger Rufus II said...

The most important part of the BLS Report last month was the Household Survey. It showed that366,000 Entered the work force, and that 331,000 of those found work.

However, and this is really important, 430,000 went Part-Time for Economic Reasons.

This correlates with the 0.1% drop in personal income over the month.

In short, the job growth is, basically, at McDonalds, and Burger King.

BLS Data

 
At 10/03/2011 11:25 PM, Blogger Rufus II said...

One thing we could be doing in our public schools is "teaching Computer Languages, and Programming." Not for the "College Prep" Kids, but for the "Going to Work after High School" Kids.

In today's Globalized World, if you're going to live 10 times as well as a Chinaman you're going to have to be 10 times as Productive. That requires, among other things, being able to sit down to a keyboard, and "talk to/give instructions to a robot."

 
At 10/03/2011 11:37 PM, Blogger Che is dead said...

Robert Higgs has been making this same point:

Private investors, despite the full recovery of real consumer spending and the increase of real government spending for final goods and services, remain apprehensive about the future of new investments, especially new long-term investments ... an important reason for this apprehension and the consequent reluctance to make new capital commitments is regime uncertainty—in this case, a widespread, serious fear that the government’s major policies in areas such as taxation, Obamacare, financial reform, environmental regulation, and other areas will have the effect of depriving investors of control over their capital or diminishing their ability to appropriate the income that the capital generates. President Obama’s harping on the desirability of making “the rich” pay their “fair share” (that is, more) of the government’s ever-rising costs only exacerbates regime uncertainty. Business leaders have spoken again and again of how the present political environment is discouraging risk-taking and entrepreneurship.

Big Government

Businesses invest to make money, and when the political class is passing major legislation with uncertain regulatory impact, running massive fiscal deficits and clamoring for higher taxes on businesses and "the rich" they are creating an environment in which no sane businessman would commit long term capital.

 
At 10/03/2011 11:58 PM, Blogger juandos said...

Hey che, thanks for reminding me about the wise observations of Bob Higgs...

 
At 10/04/2011 6:04 AM, Blogger geoih said...

Quote from Marko: "...there is a problem on the supply side so we should permanently cut marginal tax rates."

If the government continues to spend through borrowing and printing, then lowering the tax rates will at best only result in a bigger crash later (and please don't say that the deficits will be paid back when the recession ends because we all know that never happens).

 
At 10/04/2011 7:05 AM, Blogger PeakTrader said...

Demand will lift supply, or anything that'll strengthen household balance sheets, raise incomes, or lower taxes:

BLS
REAL EARNINGS AUGUST 2011

Since reaching a recent peak in
October 2010, real average weekly earnings have fallen 2.2 percent.

From recent articles:

All from October 2011

The ratio of household debt to personal income (wages and salaries only) remains at a staggering 154%, which is only 7.5 percentage points lower than in pre-recession peak.

Take-home pay, adjusted for prices, fell 0.3 percent in August, the third decrease in five months, and personal income dropped for the first time in two years.

Consumer spending fell 2% last year, following a 2.8% decline in 2009.

Median household income in 2010 fell to $49,445, the lowest in more than a decade.

Salary and benefit growth “has been going nowhere”...“One of the key reasons the recovery has stalled is that real incomes have fallen.”

“Those who are employed are worried about their income and are seeing real purchasing power get squeezed, therefore they’re set to retrench a bit.”

"The biggest issue is that labor income is soft at a time when we’re getting no offset” from other sources."

A record 91 percent of consumers expect that growth in their incomes will match or fall behind price gains in the coming year, according to participants in the September Thomson Reuters/University of Michigan sentiment survey.

 
At 10/04/2011 8:50 AM, Blogger AIG said...

"First, you have to understand that virually All new job creation is from "Start-ups."

On what evidence is this based on?

"One thing we could be doing in our public schools is "teaching Computer Languages, and Programming." Not for the "College Prep" Kids, but for the "Going to Work after High School" Kids."

If they were smart enough to learn programing in high school, they'd be smart enough to take the classes themselves (which are there).

 
At 10/04/2011 1:04 PM, Blogger Benjamin said...

Rufus II--

Hey you are right. You want an SBA loan? Pledge assets as collateral. Your employees and your equipment is usually worth beans. Real estate is worth something---or used to be.

We have to re-inflate real estate.

 
At 10/04/2011 3:39 PM, Blogger t11s said...

Personal consumption doesn't look too healthy to me, but perhaps more of that disposable income is moving into reducing personal debt (which would make an excellent additional data line).

 
At 10/04/2011 3:55 PM, Blogger marmico said...

Personal consumption doesn't look too healthy to me

Bingo. That's why juandos is full of crap when he extols the virtues of Bob "ignoramous" Higgs or Mark "latch on" Perry.

Households don't spend imputed rent, third party health care payments, "free" financial services or... They spend out of pocket cash, debit or credit.

Retail sales are punk.

Nice chart, eh Perry. You gotta improve your game, man!

 
At 10/04/2011 4:15 PM, Blogger Mark J. Perry said...

Real personal consumption expenditures are above pre-recession levels in 2007, see new chart in the post.

 
At 10/04/2011 5:06 PM, Blogger PeakTrader said...

"Real personal consumption expenditures are about 1% above the pre-recession level."

Over a four-year period in the early 2000s, when the economy peaked, fell into recession, and had a jobless recovery, real personal consumption expenditures increased over 10%, and without trillions of dollars of additional government spending.

http://research.stlouisfed.org/fred2/series/PCEC96

 
At 10/04/2011 5:51 PM, Blogger PeakTrader said...

I'd like to see an updated article on this "recovery."

Editorial: A Tale Of Two Recessions And Two Presidents
04/28/2011

• GDP. In the seven quarters after the 1981-82 recession ended, the economy cranked out quarterly growth rates that averaged 7.1%. Under Obama, GDP growth has averaged a mere 2.8%.

• Unemployment. Under Reagan, the unemployment rate had fallen to 7.5% by this point in the recovery. Under Obama, it's still stuck at 8.8%.

• Long-term unemployment. There were far fewer long-term unemployed by this point in the Reagan recovery; just 18% of the unemployed had been without a job 27 weeks or more. Under Obama, that figure is an astonishing 45%.

• Consumer confidence. By this point in the Reagan recovery, the Conference Board's Consumer Confidence Index had hit 100. Today, the index stands at just 65.4.

• Deficits. Under Reagan, the federal deficit was trimmed to 4.8% of GDP by 1984. Under Obama, the deficit is expected to climb to 10.9% of GDP this year.

Obama massively increased spending, vastly expanded the regulatory state, and pushed through a government takeover of health care.

What's more, he constantly browbeats industry leaders, talks about the failings of the marketplace and endlessly advocates higher taxes on the most productive parts of the economy.

In contrast, Reagan pushed spending restraint, deregulated entire industries, massively cut taxes and waxed poetic about the wonders of a free economy.

 
At 10/04/2011 6:02 PM, Blogger PeakTrader said...

Optimism (or "animal spirits") is a significant factor on economic growth.

 
At 10/04/2011 9:00 PM, Blogger sethstorm said...


Businesses invest to make money, and when the political class is passing major legislation with uncertain regulatory impact, running massive fiscal deficits and clamoring for higher taxes on businesses and "the rich" they are creating an environment in which no sane businessman would commit long term capital.

Excuses, excuses for businesses that only want endless political favors, make endless complaints about everyone else, and think they are beyond making a single sacrifice.


What's more, he constantly browbeats industry leaders

You want that to stop, start by not antagonizing the unemployed, the workers, and anyone else that businesses have attacked since the current administration was projected to win.

Otherwise, they deserve anything to happen to them, anywhere in the world.

 
At 10/04/2011 9:05 PM, Blogger sethstorm said...


• Long-term unemployment. There were far fewer long-term unemployed by this point in the Reagan recovery; just 18% of the unemployed had been without a job 27 weeks or more. Under Obama, that figure is an astonishing 45%.


Thank businesses for actively avoiding these people, instead of finding ways to make use of them. Ask the businesses, not the government why they continually avoid these people - or try to justify it by making an attack on their skillset.

Perhaps businesses need to be reminded that they are not a deity, despite the actions of business thinking they are the Divine Creator and Destroyer of jobs.

 
At 10/05/2011 2:14 PM, OpenID voxrationalis said...

So many problems here. Shall we start with the selective use of data? No, let's start with the fact that 3/4 of business investment is back to 2007 levels. Nah, let's mention that the linked-to Samuelson piece provides no support whatsoever for the argument. No, wait, maybe we should start with the absurd assertion that "recovery" is marked by a return to the 2007 GDP level rather than by a return to the long-term potential GDP trend.

So many starting points.

 

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