Perspective is everything. Policymakers must change their perspective on the economy in order to change the economic realities.
In late 2007, the United States economy headed into recession. As measured by the drop in real gross domestic product (GDP), it was the worst recession since the early 1980s. The economy contracted at an annual rate of 1.7 percent in the third quarter of 2008, close to the 2 percent drop in the second quarter of 1980.
However, in perspective, it was a mild recession. The early 1980 recession was followed by another period of declining GDP in 1981. Unemployment rose to 10.8 percent in 1982 and remained above 9 percent until late 1983. While declining, the inflation rate still averaged 10 percent annually through 1982.
In terms of GDP, inflation and unemployment, today’s economy looks relatively strong. We have little to complain about.
Tell that to the over 13.5 million American workers who remain unemployed. At 8.8 percent, the U.S. unemployment rate is well above 5 percent, which most economists see as a normal. At 9.7 percent for March, the Idaho unemployment rate remains above the national average and the state’s previous high of 9.6 percent in February 1982.
Despite mild in comparison to the early 1980s, the most recent recession is turning out to be more problematic. The necessary perspective for economic recovery is a look at private investment. Investment is fundamental to long-run growth for any economy. Investment in equipment, software and property improvements increases worker productivity and our standard of living.
In terms of private investment, this economic recovery is one of the worst on record.
In 1980, private investment in equipment, software and property rose 12.3 percent and 13.1 percent in the third and fourth quarter, respectively. Following the subsequent 1982 recession, investment spending rose 6.6 percent on average in 1983 and 1984.
There is no investment recovery in today’s recovery. Since the beginning of 2009 private U.S. investment has declined 0.3 percent on average. Private investment at the state level is also weak. Idaho residential building permits are a third of what they were in 2007, and total business filings with the Secretary of State are 30 percent lower.
The dramatic decline in private investment occurs despite rising cash balances on the books of U.S. corporations. The Federal Reserve reports that corporate cash balances grew nearly tenfold between 2008 and 2010. U.S. corporations now hold twice as much cash as they did just before the recession.
Meanwhile, what little investment activity is occurring is happening elsewhere. According to the Department of Commerce capital expenditures outside the U.S. by multinational corporations based here amounted to 25.5 percent of total expenditures in 2007. In 2009 that percentage rose to 27.5 percent.
U.S. multinationals are looking for economic growth in the more vibrant economies of China, India and other emerging markets.
This historical perspective does not provide a favorable long-term outlook. The economic reality facing U.S. policymakers today is that businesses don’t want to invest here.
Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa.