The question that will plague policy makers in the years ahead is why businesses are choosing not to invest in new capacity.
The Fed models and government models all assume a certain level of investment when an economy is growing. In turn that creates fresh growth and a virtuous cycle is underway. The Fed sees that cycle about to bear fruit, but what if Yellen & CO are wrong?
In Canada, the recovery has been a step ahead of the US and the Bank of Canada models repeatedly expected investment to pickup. That was the basis for hawkish BOC commentary as far back as 2011. They’re still waiting and this year they were forced to admit that they’re ‘puzzled’ by the lack of investment.
There are no easy answers but one reason may be that it’s more profitable to invest in finding offshore tax sheltering schemes than to build a new factory.
In any case, I believe the Fed will have to confront the ‘puzzling’ trade next. Analysts at Morgan Stanley are out with a note saying to watch the upcoming earnings season closely for signs of capex but they’re sceptical:
We don’t think capital spending is likely to pick up significantly based on the higher-frequency data we analyze. During this earnings season we will look for any signs of rising capital spending, or a need for it.
Analysts at Standard & Poor’s say it’s a global phenomenon; they noted that global capex fell 1% in real terms in 2013 and their current estimates suggest a similar decline in 2014.
I don’t think the Fed or most developed central banks are even at the point where they realize there is a problem but until they do, and until they find a solution, growth will continue to disappoint.
