ABA Banking Journal - November 2007 - (Page 68)

briefing The Economy MICHAEL FEROLI U.S. Economist, JP Morgan Economics, New York U.S. business capital: growing slowly, aging quickly THE REAL STOCK OF U.S. business capital has been growing very slowly. In the five years ended 2006, the stock grew less than in any fiveyear period since World War II. Capital—computers, structures, transportation equipment—grew only 2.2% last year, a very slow rate for the mature phase of a business cycle. As capital stock growth has slowed, so too has depreciation. As a share of national income, depreciation had tended to move up over time as fastdepreciating, high-tech equipment became more important. In the current expansion, however, the depreciation share has actually moved down. The trend in depreciation before tax accounting considerations shows a step down in growth to 4.5% annually in recent years from 7% in the late 1990s. That shift down has freed up more cash to be allocated to profit. Capital expenditure has been weak over the past year, and tighter financial conditions plus a soft outlook for output growth suggest that it may remain on the weak side for the near future. The risk of a 2001-style collapse, however, looks small. Instead of facing a capital overhang, firms are using a very old stock of capital. For that reason, any big cutback in capital outlays in the current situation could jeopardize operating income. The downside risk seems remote that firms will pull back on investment spending because they face a capacity glut. 68 NOVEMBER 2007/ABA BANKING JOURNAL Looking across industries, there are some noticeable pockets of strength, but the slowdown in capital stock growth has been fairly widespread. Here is a look at six industries: ■ Manufacturing. The capital base has declined over the past five years. If persistent dollar weakness is to rekindle the manufacturing base in the U.S., factories will need to ramp up capacity. 1990s, so a further slackening in this industry could have wide implications. ■ Information. Capacity growth in this sector, mostly made up of telecom companies, has been stagnant since 2001. There have been signs recently that capital growth is beginning to ramp. ■ Finance. Contrary to popular belief, the finance sector is an impor- Capital stock growth Health care Finance & insurance Information Transportation Retail trade Manufacturing -0.6% 3.6% 4.2% 5.8% 2.0% 7.2% 0.6% 3.0% 0.3% 3.3% 1.7% 2.2% Annualized growth rate 1996–2001 1.5% 1.4% Utilities Mining 0.4% 2001–2006 2.9% Source: U.S. Department of Commerce ■ Mining. The one bright spot for business capacity has been the mining sector, where high commodity prices have spurred strong capital growth— particularly in oil and gas. ■ Retail trade. Capacity growth slid in this sector, hitting a 53-year low last year. This sector was a major contributor to the productivity revival of the tant driver of capital deepening in the economy, particularly in high-tech equipment. Capital growth here has recently slowed. ■ Healthcare. The quiet motor of the U.S. economy, the healthcare sector has experienced steady growth in capacity—faster this time than in previous expansions. BJ www.ababj.com/subscribe.html http://www.ababj.com/subscribe.html

Table of Contents Feed for the Digital Edition of ABA Banking Journal - November 2007

ABA Banking Journal - November 2007 Contents Editor’s Column Briefing: Good News for Mortgages Sleight of Mind N.Y. Hiring Bonanza May Be Bane Snapshot: A Look at Held-For-Investment Loan Growth ABA Resources ABA Chairman’s Position “The Moose Bank” Thrives on Manufactured Housing Loans Finding the Middle Way for Your Bank’s Retirement Program Pass the Aspirin Cover Story: Self-Service Steps Up DIY U.K. Style Marketing to Millennials Getting Real With “Gen Wired” Ethnic Marketing: Disinterested Banking Getting Good at Global Sourcing Case in Point Turn Compliance on It's Head Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - November 2007

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