I am writing a piece on the Electro-Motive dispute in Canada and needed data on equipment and machinery. I had forgotten which CANSIM series I was looking for and asked if anyone knew. Reader Chris Hylarides pointed me towards a piece written by... Stephen Gordon. Not only did Stephen's piece have the data I was looking for, it answered the questions I was looking to ask! However, his piece was from early 2006. How have things changed since then?
If high profits weren't leading to higher levels of fixed business investment, that would definitely be a cause for concern - although not necessarily a reason for increasing corporate tax rates. But is it in fact the case? The reference to 'corporate capital spending' bothers me: I've never heard of a data series with that name, and a search of CANSIM (Statistics Canada's main source of economic data) leaves me no wiser as to what he meant.
Here's what I did find*. First, there's little reason to claim that increases in profits aren't being matched by corresponding increases in investment:
Stephen's chart extended from 1991 to 2006. Here is the same chart, from 1991 up to the 3rd quarter of 2011:
Profits and Expenditures on Machinery and Equipment
Investments in machinery and equipment are still going strong. In Stephen's second graph he concluded "as a proportion of GDP, expenditures on machinery and equipment are at a 45-year high". Here is the same data, starting from 1961 and going up to Q3 2011.
Private Expenditures on Machinery and Equipment as a % of GDP
Large downard blip during the recession, but investment in machinery and equipment has bounced back and is as strong as ever.
Mike: are you sure that last graph is right??? That is a stunning rate of increase, trebling as a percent of GDP since 1960. My prior would have been that it was roughly flat. If it is right, all I can say is: Wow!
Posted by: Nick Rowe | January 12, 2012 at 02:19 PM
Seems high to me, but Stephen and I got the same numbers from 1961-2006 (which made it really easy for me to check my work - I could check my work against his).
Posted by: Mike Moffatt | January 12, 2012 at 02:24 PM
You have to be careful about interpreting those shares of real GDP. Those are constant-dollar numbers, and the shares will change each time StatsCan resets its base year.
What you *can* say is that real expenditures on M&E have grown more rapidly that real GDP.
Posted by: Stephen Gordon | January 12, 2012 at 02:25 PM
Ahh.. okay. That makes sense! Is there a way we can account for that?
Posted by: Mike Moffatt | January 12, 2012 at 02:27 PM
Ah. So if nominal expenditure on machinery and equipment kept a constant share of nominal GDP, but the relative price of machinery and equipment fell by two thirds, we would see a trebling. That makes sense. And if computers and hi-tech stuff are in there, that big fall in real price is plausible. But it's still makes me Wow!
Posted by: Nick Rowe | January 12, 2012 at 02:31 PM
Not really. It's a pretty fine point, and lot's of people punt on it - including, obviously, me. I came across a correction on that point long after I wrote that.
BTW, there's also this old post on profits vs investment
Posted by: Stephen Gordon | January 12, 2012 at 02:32 PM
Nick - yes. Not accounting for that change in the relative price of M&E leads to things like this debacle.
Posted by: Stephen Gordon | January 12, 2012 at 02:37 PM
If you are going to compare profit shares of GDP and investment in m and e share of GDP then you have to look at the latter in nominal and not real terms.
Posted by: Andrew Jackson | February 03, 2012 at 05:07 AM
Andrew: why would you want to do that? It's a bit like comparing profits in apples+orange production to investment in apple trees, when the price of apple trees is falling compared to oranges.
Posted by: Nick Rowe | February 03, 2012 at 08:27 AM