Most measures of the economy have improved recently, however, I have mentioned that this is not the Kick, the point at which growth is self feeding. The following charts give a good representation of my thinking on the issue

This from Gallup is small business expectations for capital spending over the next year.

Trend: Wells Fargo/Gallup Small Business Index -- Future Expectations for Capital Spending

As you can see it is not only up but has crossed over, with more business expecting to increase than decrease investment.

However, here are small business expectations for obtaining credit over the same period.

Trend: Wells Fargo/Gallup Small Business Index -- Future Expectations for Obtaining Credit

They haven’t changed that much.

Which implies that businesses are planning to invest despite the fact that liquidity constraints are still binding.

The point I make, is that these businesses don’t think in terms of how everyone else’s plans are going to affect their plans. They simply take the world as it is.

However, if they all try to purchase capital then hiring will have to pick-up to meet demand. This in turn will increase their revenues which will increase their credit worthiness. It will also decrease default rates which will make banks more willing to lend generally. This will bring down the difficulty of obtaining credit number, which in turn will make expansion even easier.

My macro interpretation is that depreciation is driving up the natural rate of interest causing increased investment. Once the natural rate breaks through zero then monetary policy will be expansionary again and this will lead to self feeding growth.

About these ads