Amid Fiscal Uncertainty, Businesses Hit the Pause Button

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from The Center for American Progress,

The economy is still picking through the pieces of the mess wrought by congressional conservatives’ latest fiscal drama. It is clear that the government shutdown and near default on government debt contributed to a slowdown in economic growth this fall. This slowdown followed modest growth from the fall of 2012 through the summer of 2013. Business investment in particular slowed, partially due to the economic uncertainty following congressional conservatives’ brinksmanship on government spending, taxes, and the debt ceiling—the amount the government can borrow without congressional approval. Congress now has an opportunity to develop a pro-growth budget and end the string of fiscal showdowns that have come to signify the policy approach of a radical conservative minority in Congress. A pro-growth budget would boost economic growth and job creation by investing in infrastructure and education and creating predictability for America’s businesses.

Calculations based on data from the U.S. Bureau of Economic Analysis, or BEA, for the past few quarters—from the end of 2012 through the summer of 2013—show that business investment has slowed. Business investment fell precipitously during the Great Recession, from 13.4 percent of gross domestic product, or GDP, in December 2007 to 11.4 percent of GDP in June 2009. It eventually began to recover again and reached its latest high point with 12.3 percent of GDP in 2012 before leveling off throughout 2013. Importantly, though, investment started to slow even before that, specifically in the third quarter of 2011—the same quarter during which radical conservatives brought the U.S. government near its first ever default on its debt.

And the situation is actually worse than these calculations on overall investment spending suggest. Investment goods, especially computers and software, depreciate more quickly than in the past. Businesses consequently need to spend more money today to replace obsolete capital such that the net increase in usable stuff is relatively small. Net investment—the amount of investment that does not go to replace obsolete investment goods—fell from 3.4 percent of GDP in December 2007 to 0.7 percent of GDP in June 2007. It had recovered to 2 percent of GDP by the end of 2012 before again dropping below 2 percent in 2013. Net investment had already slowed prior to 2013, similar to total investment, starting with the third quarter of 2011.

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