Academic journal article ABA Banking Journal

U.S. Business Capital: Growing Slowly, Aging Quickly

Academic journal article ABA Banking Journal

U.S. Business Capital: Growing Slowly, Aging Quickly

Article excerpt

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 five-year 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 fast-depreciating, 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.

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. …

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