Tuesday, September 24, 2013

Kudlow's Lament: Is capital on strike in the U.S.? (written by Marc Wiersum of the Market Realist)

Investment in the United States
The below graph reflects the capital strike in fixed domestic investment in the United States. The “strike” of U.S. capital is the notion raised by CNBC commentator Larry Kudlow that despite record profits at U.S. companies, profits and capital aren’t recycling back into the U.S. economy as investment. As displayed below, U.S. corporate profits (the red line) were approximately 45% of total investment in the United States during the Reagan era in the 1980s. However, corporate profits now represent 85% of total investment in the United States—or nearly twice the historical levels. The most disturbing part of this trend is that despite the dramatic recovery in corporate profits post–2008 crisis, there hasn’t been an offsetting growth in investment in the United States.
What is fixed investment and why is it important?
“Fixed investment” refers to fixed capital investment, including the replacement of depreciated fixed capital. Fixed investment doesn’t include financial assets such as bonds. Fixed investment, from an accounting perspective, includes physical assets held one year or more. Fixed investment is important because the level of fixed investment indicates potential longer-term economic growth and future productivity gains. The more fixed capital available per worker, the more each worker can produce. When fixed capital growth rates decline, productivity and economic growth rates are more likely to slow in the future. Fixed investments include items such as machinery, land, buildings, installations, vehicles, and technology. In the 1980s, fixed investment stood at approximately 20% of U.S. dross domestic product, or GDP, though it’s now closer to 15% of U.S. GDP.

To continue . . .