Net investment as a share of GDP has been declining: Net investment—total new investment minus depreciation—is barely keeping pace as businesses invest more in computers, software and other information technology assets that depreciate more quickly than in the past. Now businesses must spend more money to replace obsolete equipment, and thus more money must be spent in total, before the nation’s capital base actually expands. During the current business cycle, which started in March 2001, net investment as a share of GDP fell to a historic low of 1.5 percent.
Little investment in the knowledge-based economy: While investments in information processing and software equipment expanded relative to GDP by 1.3 percentage points during the 1990s, they have declined by 0.7 percentage points since March
2001. Over that same period the capital stock in information processing equipment and software, net of depreciation, declined relative to GDP for the first time since the early 1950s.
Businesses used money for share repurchases and dividends instead of capital expenditures: The share of pre-tax profits used for net share repurchases and dividend payouts was 84.2 percent during the current business cycle, larger than it was for any previous business cycle. The share of after-tax profits used for net share repurchases and dividend payouts was 120.7 percent, another record high for any business cycle.
Consumption growth did not provide sufficient incentives for businesses to invest: Throughout the current business cycle, from March 2001 to March 2007, consumer expenditures increased by an annualized inflation-adjusted rate of 3.2 percent, below the consumption growth rate of the 1980s and the 1990s. In addition, consumption so far this business cycle has been fueled to a much larger degree by new debt. Household debt grew more than four times faster in this business cycle than in the 1990s.
Investment and productivity growth may be linked: Since 1947, faster productivity growth was preceded by business investment expansions relative to GDP. Periods of stronger investment growth were typically followed by an acceleration of productivity growth over a span of five years. Given low business investment levels in the United States in the 21st century, government policymakers may soon discover that the reverse is also true.
Business investment could replace consumers as the driver of the economy: Stronger business investment growth could give the economy new momentum as consumption growth slows. Consumption has contributed to 83.9 percent of economic growth during this business cycle. But this consumption was largely driven by an unprecedented debt expansion that is now coming to an end. If investment growth were to rebound to the levels of the 1990s, when it contributed to over one-fifth of the total GDP growth rate, investment growth could then substitute for the waning momentum of consumption-led economic growth.