The second development, unfortunately, is evidence of sluggishness in a new area—business investment in equipment, and, in particular, equipment outside of the reasonably strong high-tech area. The performance in non-high-tech equipment over the past nine months or so is surprising, since the business environment is marked by high profits, relatively favorable financing conditions, and growth in business output.
Part of the explanation for this sluggishness reflects what’s happening in construction—given the slump in housing, it should come as no surprise that investment in construction-related equipment has fallen off. However, even if we ignore this category, business investment has still been weak.
One commonly heard explanation is “caution in the boardroom,” as companies have felt the shocks of corporate scandals, terrorist attacks, war, and surging oil prices. While there may be some truth to this explanation, it does seem to fly in the face of the rapid growth we’ve seen in employment, which—given the cost and disruption of hiring and then having to lay off workers—also should be restrained by caution about the future.
Another explanation for weak business equipment investment that may be more likely and that is a bit more troubling is the possibility that the trend rate of productivity growth has slowed from its very fast pace over the last five years or so. For 2000-2005, the estimated trend rate was a blazing 3 percent, but for 2006, the actual data on productivity growth came in at a rate of only 1-1/2 percent. Discerning the extent to which these new lower numbers reflect a short-lived, cyclical phenomenon, a downshift in the trend rate or both, is neither obvious nor straightforward.