Services Hindering Economic Recovery

U.S. businesses generally undertake new capital spending for one of two reasons; either to replace their existing capital stock or to facilitate new expansions. The recent recession and weak recovery witnessed a significant drop in investment as businesses severely curtailed spending to facilitate expansion and some industries even allowed their capital stock to decline outright. Despite significant incentives to spur investment, a proper recovery has yet to develop. Surprisingly, service-producing industries, not manufacturers, are accounting for much of the current weakness.

Inferences on the state of capital spending can be derived from both the capacity data produced by the Federal Reserve and in the financial data published by publicly traded companies. In aggregate, both measures show that investment spending has remained sufficient to offset the depreciation of the capital stock. However, they tell different stories over the past nine months. The government data show a stabilization in capacity in the closing months of 2002 and a small improvement this year. Meanwhile, the data from publicly traded companies indicate that the pace of growth in the capital stock has continued to weaken.

Source: Economy.com (If you subscribe.)