Businesses are finally investing again

All the pieces for a strong economic recovery are slowly coming together.

By The Week Aug 29, 2014 12:44PM

A United Auto Worker works on the assembly line at Chrysler's Jefferson North Assembly plant in Detroit on April 26, 2012 (© Carlos Osorio/AP Photo)By John Aziz, The Week


There has been a slew of positive economic signs in 2014. Stocks continue to soar to record highs. Jobs are being created at the best pace since the 1990s. GDP grew last quarter at a blazing 4.2 percent pace.


Even food stamp usage has begun falling after years and years of going in the other direction. Corporate profits are at all-time highs.


But the one big piece missing from the puzzle (alongside wage growth, which is still relatively lackluster) was capital expenditure.


U.S. firms were sitting on huge piles of cash, and after 2011 they stopped investing it in the way you would expect to see during an economic recovery.


Yet at long last, as Sam Ro of Business Insider points out -- and as I predicted earlier this month -- that is changing. American firms' massive reservoir of cash is shrinking, but money is pouring into business investment.


This was inevitable, mainly because America's factories, infrastructure, and equipment are the oldest they have been since the Great Depression. Crumbling equipment and premises are bad for business. If firms want to keep up those high profit margins and remain abreast of the competition, they need to replace, repair, or upgrade obsolete and failing equipment and premises.


The really exciting thing is that this is a very good indicator of a strengthening economic recovery that includes lower unemployment and higher economic growth. Sitting on cash might give firms a security blanket to insulate themselves against future economic shocks, but it does nothing to benefit the wider economy. It is just idleness.


Investing that cash, on the other hand, encourages a beneficent spiral -- as firms invest, they put money in workers' pockets, which increases disposable income, bolsters confidence, and raises demand in the economy. Growing capital expenditure is the best evidence thus far that this is not a bubble, but a real, solid economic expansion. And long may it last.


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36Comments
Sep 1, 2014 9:48AM
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Labor is 50% of business overhead. Corporate America has made windfall profits by doing business with as little employee cost as possible. Each fiscal quarter over the last several years they have increased income not by increasing sales, but rather  by eliminating as many jobs as possible, by eliminating more costly senior workers and by freezing or cutting salaries and benefits. Lets not forget outsourcing to fifty cent an hour labor markets whenever possible. They've finally reached a profit level where they'd rather invest than pay taxes.
Aug 30, 2014 8:39AM
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What is it that truly improves the economy? In the 60's when in college our economics professor said follow these three sales. Housing, autos and durable goods.
Sep 1, 2014 8:30AM
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Most people don't know just how much we make in the US. They have been lead to believe it all comes from China. I work retail and love to point out how much is American made. We need the reinvestment if we want to hold our own in the world market.
Sep 1, 2014 8:56AM
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What are they investing in?  China.

Aug 29, 2014 7:38PM
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"" Too ad they are all part time and at minimum wage.

Aug 29, 2014 7:27PM
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The GDP did not grow as stated.  It is all nonsense.
Aug 29, 2014 8:09PM
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Wait a minute....I thought Russia was bring the market down?
Sep 1, 2014 3:54PM
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The Fed is still printing money so what does that tell you about the maket?Who will pay for this bull from the FEd?
Sep 1, 2014 1:24PM
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The writer points out that this spending is being done out of necessity - not because businesses think the economy is doing well.
Sep 1, 2014 5:32PM
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obama scared all businesses into a coma and not self induced!
Sep 1, 2014 10:53PM
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Come on, Neocapitalist and 1-Classic Lady, KOO has made LOTS OF MONEY!!!! From what I hear, he plays Monopoly [the board game] every day!!!

1-Classic Lady, if you're and anarchist, good for you!!!

Neocapitalist, you're right!!!!  Oompa looopa, KOO, KOO!!!

Aug 30, 2014 12:03AM
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   Why are these right wing wacko's rooting against prosperity ? Truly these scum bags are not Americans. Only a toilet trout would wish for bad news, yet the Faux news crowd smears the stench on themselves daily and cries " Come follow us to ruin " Shame on you, Shame on you fools.
Aug 30, 2014 6:59AM
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Prefer this report, or back to 2008 when Bush publicly told the world that unless congress gave at least $1 Trillion to financial institutions, we would face an economic meltdown.

The financial institutions got their Trillion, and we had the Bush economic meltdown anyway.  Current news is much better.  Disagree, keep voting "conservatives" in.


Sep 1, 2014 10:36AM
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"Fallen Angel America" is on a depraved course. We are in a mirage. Read the Tattoos. With the many wars, wares's and more wars emerging, we are going from 17 trillion to 34 trillion of debt. Only God and a new "Constantine The Great" can save us now. Happy Labor Day!!!
Sep 2, 2014 8:12AM
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"All the pieces for a strong economic recovery are slowly coming together."

 

Well.......'pieces' is certainly correct.

Aug 29, 2014 2:39PM
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Hmm other than 'GDP grew 4.2% last quarter', all I read is blah, blah, blah..... what lousy reporting.
Sep 1, 2014 12:38AM
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President Obama and his MIT-trained turn-around team did it. We are saved and on the path to prosperity!!! Damn the Republican party and their oil money. Wireless electricity, as predicted by Tesla, is the future of automobiles and automation. No more U.S. dollars wasted on Arabs!!!! America rocks!!
Sep 1, 2014 12:29AM
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Reagan coined the phrase "trickle down" but lied and failed to produce it. Instead, he blew the Federal government up into the largest employer in the USA and created a Socialist country. His minions, George Bush, Sr. and Jr., then used the religious extremism of the far right to take us into a global spree of losing wars, mostly over Big Oil and nearly collapsed the U.S. Treasury and the banking system failing to oversee the government. President Obama actually created true trickle down by tripling the U.S. stock market and creating real jobs, not federal government jobs. GDP is created by companies producing goods and creating real earnings that create more jobs. It's not a conspiracy that Obama saved us. It is because he is the true Centrist and Progressive. The real Republican. The Republican Party itself is so far gone to the religious right they are no longer functioning as a real political party and should be disbanded.
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