New orders in March for capital goods, a proxy for business investment, beat expectations (+2.2% vs. +1.5%) but have managed only lackluster growth over the past year. In real terms, orders are still about 20% below the levels of 2000, and still 10% below their pre-recession high of 2006. Without more robust business investment—which provides the wherewithal for increasing worker productivity—it will be difficult for the economy to do much better than 2-3% growth.
We can only speculate as to why businesses have been so modest in their investments for the future, but likely candidates for explanations include excessive regulatory burdens (e.g., Obamacare, Dodd-Frank), very high corporate tax rates compared to many other countries, anti-business sentiment in Washington, and a general unwillingness to take risk. Lackluster business investment has nothing to do with a lack of profits, since corporate profits after tax are at all-time record highs (see chart above).
It's disappointing, to say the least, to see so much potential new investment being held back for reasons that could be addressed by smarter public policy. But the mountain of corporate profits being stashed away both here and overseas is like a bright beacon lighting the way—for those politicians who understand how to lower the barriers to new investment—to a more productive and prosperous economy in the years to come.
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