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Weekly Economic Letter

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Investment and production capacity rates: Will skeptics be confounded?

Tue, Oct 6 2009, 06:06 GMT
by Economic and Strategy Team

National Bank of Canada


Summary

  • A good number of observers today believe that business investment cannot rebound in the United States in the light of the very low production capacity rates prevailing. 

  • Yet, present conditions are extremely propitious for investment. After the worst collapse in machinery and equipment investment since 1960, the weight of this component in GDP is at its lowest point since 1965. It must now indubitably bounce back. 

  • U.S. firms have slashed their capital expenditures so much so that never before in the history of the United States has such a high consumption-to-GDP ratio been underpinned by such a low investment-to-GDP ratio. 

  • Consequently, we are of a mind that there is a pent-up demand for investment among U.S. corporations. 

  • What counts more here is the connection between profits and business investment rather than between business investment and production capacity rates. 

  • In this regard, the environment is very positive as far as earnings go, given that productivity has been raised for the first time ever during recession instead of recovery. Consequently, skeptics may well be confounded in the end.

Published on  Tue, Oct 6 2009, 07:24 GMT


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Legal disclaimer and risk disclosure

This presentation may contain certain forward-looking statements about the 2009 Economic and Financial Outlook. Such statements are subject to risk and uncertainties. Actual results may differ materially due to a variety of factors, including legislative or regulatory developments, competition, technological change and economic conditions in Canada, North America or internationally. These and other factors should be considered carefully and readers should not rely unduly on National Bank of Canada’s forward-looking statements. This presentation may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be referred to without in each case the prior express consent of National Bank.

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