Summary
- After going through what was arguably one of its worst episodes of resource allocation of all times, the U.S. economy is due for a serious adjustment in this regard.
- During the recession and the financial crisis, businesses slashed investment in machinery and equipment (IME) like there was no tomorrow. The ratio of IME to GDP dropped to a 40-year low.
- Annual growth in the capital stock in machinery and equipment fell 5 percentage points and marked a first contraction since WWII.
- The collateral damage has been such that the level of investment in 2009 was not even enough to offset the normal depreciation of the capital stock.
- In the current economic cycle, firms will almost inevitably have to press down on the gas pedal for some IME catch-up growth.
- Though business IME accounts for little more than 6% of the economy, it will have the indirect effect of sustaining consumption growth by bringing back to work many of those laid off in the course of the severe downturn.
- This should be enough to shift the dynamics and go from a recovery fuelled by ultra-accommodating public policies to one driven by private demand that will finally be able to take flight on its own wings.
- Businesses, then, will be called upon to spark the recovery beginning to unfold.
