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Capital spending still modest

New orders for capital goods, the "seed corn" for future productivity gains, fell in October, and so far they are up only modestly (5.5%) from their low of earlier this year. It would appear that businesses are not in a rush to invest their rising profits. The improvement to date doesn't seem significantly different from what happened following the 2001 recession, and that recovery was notorious for being a "jobless" recovery that took several years to get off the ground. Policies out of Washington are not helping the situation, as businesses contemplate the impact of rising taxes and a more burdensome regulatory environment.

Indeed, if we compare capital spending and corporate profits, we see a glaring disconnect. Corporate profits have increased 75% since the end of 2001, but capital spending has increased only 9% over the same period. This is speculation, but it might be the case that much of the unspent profits have ended up being invested in Treasury bills and bonds, lent to the government to fund transfer payments and make-work projects, instead of being invested in new plants and equipment.

The lack of business investment, and the dearth of policies designed to encourage new investment, are the main factors driving bleak forecasts of economic growth.

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