The trend of declining business investment in
developed economies that has been evident during the financial crisis has been
observed since the early 1990s.
cash balances can be attributed to a number of factors: for US firms, the
desire to avoid the high headline corporate tax rate by technically parking cash
overseas is one incentive, but the trend on investment has been seen also in
other countries - - the declines in the European countries are not cyclical,
even though 2012 was a recession year in Europe. Germany, for example,
experienced a fall in the investment to profits ratio of 0.17 by 2008 - -
slightly less than the 0.16 decline shown above.
Dr. Daniel Bachman of
says that investment spending during the current US recovery has been lower
relative to profits than in the past. In the previous recovery, investment
averaged 2.2 times profits. In the current recovery, that ratio has fallen to
1.8. The ratio jumps during recessions because profits are more volatile than
The decline is part of a trend going back to
1990. Since the end of the 1990 recession, each recovery has been associated
with a lower ratio of investment to profits. But that’s after recoveries in the
1970s and 1980s saw the ratio of investment to profits rise.
Dr. Bachman says different US industries
experienced surprisingly different changes in the relationship between
investment and profits. Information spent over 10 times industry profits on
physical and intellectual capital in 1998, a ratio that fell to just 2.8 by
2012. Information also had an annual average rate of growth of profits of 16%,
not much less than top-performing mining and finance.
He says goods-producing industries and wholesale
and retail trade saw relatively small declines in investments relative to
profits and relatively slow profits growth. Services industries such as health
care, education, and finance saw the largest declines in investment and the
fastest profits growth. The high correlation (80%) between profit growth and
lack of investment by industry is an important feature of the weak investment
spending that should be considered more carefully. The combination of that
relationship and the prominence of industries such as information and finance in
contributing to the decline in investment relative to profits suggest that the
increasing role of information processing equipment may be an important driver
of this phenomenon.
Dr. Bachman concludes: "The most likely
explanation seems to be the changing nature of technology. The decline in the
United States is concentrated in industries - - such as information and finance
- - that use information technology intensively, and it has been a feature of
the economy since 1990. That suggests (although it certainly does not prove)
that the increasing importance and declining cost of information processing
equipment may be a key to understanding the decline in investment spending
relative to profits."