The headline title of an article in today’s US print edition of the Wall Stree Journal says it all: ‘Firms Shy Away from Spending‘. The article highlights recent data that suggests that firms in the US are reducing spending and pretty much across the board. Business investment has grown 2.2% year on year, the one of the lowest in a 6 year period, the article says. The narrower aspects of spending, such as on capital, are declining even more, falling 3.8% year on year. This is most worrying since such spending is required to prepare for later returns from improvements in productivity. This suggests that future periods in which firms will compete may be hamstrung with outdated methods and machines, which will reinforce a sluggish economic picture.
Pundits have worried about this loss of investment in productivity gaining channels for some time. But noone seems to have any idea why buxiness spending on things like capital improvement is so low. Interest rates have been lowered to such a level in order to encourage such business spending, in order to get the economy growing again. But firms have not taken advantage of this. Well, that is, not quite in the way expected by policy makers. Firms have taken advantage of the low interest rate bearing loans, but have been on a M&A and share buyback spree.
And this is the point: firms have figured out a way to maximize cash acquisition that happens to meet short-term shareholder goals as well as management goals. Share buybacks improve earnings per share (EPS) and this is what leads to management bonuses and short-term support from investors. The problem is this: The easy money paradigm was not meant for this purpose – and the lack of investment in capital development will harm the economies natural growth rate going forward. As easy money starts to contract, firms will regret not investing according to expected desires. Long term share holder value is being erroded as investment in the future is lacking. And the side bar to this narrative is that the economy remains sluggish and wage growth flat. It has become a vicisous cycle: low growth leads to more easy money leads to slower growth and so on.
The only way we are going to get the economy growing again is to remove the zero interest rates and sell off the assets the Fed as accumulated “in our name” to save the economy. The economy has not only been saved but it has been and continues to be massively distorted. We need normal interest rates (whatever that means – I no longer remember) such that firms can do the calcuations of old that used to force them to seek productivity imroving investments. This would drive growth. This seems so clear to me now – yet no senior policy maker in Washington seems willing to fess up to this one. Shame on them.