Is investment going to be the factor driving the U.S. economy out of the recession? In a recent post, “Road to Recovery: The Consumer ?“, I looked into whether the U.S. consumer was going to be that force; however, it seemed like the consumer was not going to be the savior this time.
What’s going to drive GDP growth? Well, the options you have are consumption, investment, government spending, and net exports. Let us dive into investment.
Investment as a whole has been reducing as businesses cut back on spending, access to credit is limited, and residential investing (as in buying homes) has dropped substantially.
The question is the following: Is there a catalyst that’s going to turn these things around?
Let’s start at residential investment/housing given that this was what fueled the recent bubble and the mess that followed. It appears that house prices are still dropping and that we have a good supply of homes for some time. Additionally, as mentioned in the previous post, credit is tight and the household sector is already carrying a high debt burden. I would conclude that residential investing (and all the benefits such as home building/lender fees, etc.) is not going to be the X-factor leading us to economic recovery and 3% GDP growth. Unless, that is, we just increase our debt even more and do more of what we did in the last 6 years or so.
What about businesses? Is there anything for businesses to invest that will increase productivity/reduce costs and generate economic growth?
Businesses are always investing in a variety of elements regarding their operations (buying new machines, improving infrastructure and software, etc), but is there something that’s going to improve productivity and create 3%+ GDP growth? (Think technology in the late 80s and during the 1990s).
“Green Energy” seems like the buzz phrase lately. However, it seems like the technology is not advanced enough to create an impact (yet).
Another question is whether the current increasing positive confidence in the economy is sustainable. The markets have been going up with many people claiming that the worst is over (the people expecting positive GDP growth by year-end or Q1 2010). However, another group of people claim that the current rally and economic recovery is further than we think (more like late 2010 or 2011).
Does it matter? Well, businesses take into account future expectations of economic activity when making investment decisions. If the attitude is that things are going to recover, businesses will likely invest more. If people think the economy will not improve, business will invest less which will negatively affect GDP growth.
Overall, U.S. investments looks shaky.
{ 0 comments… add one now }