Despite record corporate profits and superlow interest rates, business equipment spending has been growing more slowly in this recovery than previous ones. But the problem is really just technology-equipment spending. Spending on non-tech equipment is meh but not miserable.
Tech, however? Kind of a disaster, up only 0.4% over the past year and up at an average annual pace of only 1.6% over the past three years, according to JPMorgan. The bank’s economics team provides some context:
Spending on high-tech equipment had been a dynamic high-growth sector in previous decades, with annual real growth averaging more than 20% per year though much of the 1990s and 10% to 15% per year in the expansion last decade. Over the past few years high-tech spending has been growing even more slowly than over- all GDP All high-tech spending, on both equipment and software, has also been slipping as a share of GDP, falling from the equivalent of 4.7% of GDP in 4Q00 to 3.4% of GDP in 4Q13.
Here’s the puzzle: some economists have theorized that economic policy uncertainty is holding back business investment. Remove the uncertainty, and business will start spending. As JPMorgan sees it, this theory does not fit the data. First, uncertainty — as measured by the Economic Policy Uncertainty Index — has been coming down since 2011, but business spending has moderated, too. JPM: “In short, spending trends through this expansion seem at odds with the uncertainty-driven story of capital spending.” Second, why would policy uncertainty affect tech and non-tech equipment spending differently? Weird.
So what’s the deal? The bank’s economists theorize the tech-spending slowdown reflects a slowing in the pact of technological advance, thus less reason to buy fancy, new machines:
In the late ‘90s real prices for IT equipment would routinely decline at over a 10% annual pace, more recently that pace of price decline has moderated to between 2-3%. Barring some unforeseen development in IT production technologies, a return to the declines seen in the ’90s seems unlikely. At least for the foreseeable future, business spending on high-tech looks like it will do no better than the trend for old-economy, low-tech capital goods.
Beyond the issue at hand, tech investment trends could be evidence that the “great stagnation,” techno-pessimists are correct. A possible counter would be that tech equipment prices, and perhaps other IT products, are being improperly measured. AEI’s Stephen Oliner:
And one example that reflects the research I’m doing now concerns the prices that we measure in the producer price index, which is the U.S. official price index produced by the Bureau of Labor Statistics for semiconductors, particularly the microprocessors that go into computers, laptops, desktops, tablets, et cetera.
The PPI shows that the price declines for those goods, which were extremely rapid throughout almost the entire history that they’ve been produced, have basically come to a halt — that in the last couple of years there have been no price declines to speak of at all, which is very strange and is in conflict with the fact that innovation in that part of the economy is still proceeding at a rapid rate. And it raises questions about whether the procedures that are being used to measure those prices are appropriate. And I personally think that they’re not, that prices are actually falling more rapidly than the official statistics would show.
As a techno-optimist, I would prefer to believe Oliner is correct. But if he is, what is really happening to tech spending?