Reihan Salam flags this post by Jed Graham as informative.

I am sure Jed Graham is a smart and nice guy. Yet, I am not sure how to take this assemblage of points.

The root of the economy’s ills is often said to be a lack of demand or elevated debt levels. While both explanations have merit, the underlying problem is depressed business investment.

Despite a healthy rebound in software and equipment spending over the past 18 months, real U.S. private investment has only reached 1999 levels.

. . .

A central problem has been the bursting of the real estate bubble. In 1998, business software and equipment outlays accounted for about 42% of private investment. Now it’s 62% because of the sharp decline in spending on residential and nonresidential structures.

. . .

Whether it’s hiring a worker or buying a new piece of equipment, companies consider “the risk-adjusted return,” said Mark Vitner, senior economist at Wells Fargo Securities.

Given increasing economic, tax and regulatory uncertainty — including sweeping rules from new health care and financial reform laws still to be finalized — companies are setting a higher bar for spending.

So, Fixed Private Investment is composed of three major categories Residential Investment, Non-Residential Structures and Equipment and Software.

Graham is acknowledging a boom in E&S and bubble burst causing a decline in Residential Investment. So implicitly we are talking about missing Non-Residential Structures.

So lets break out Non-Residential Structs into its constituent parts.


That’s a little hard to see without zooming in but the action is in dark blue, the light puke color, and green.

The dark blue is office buildings, the light puke is multi-merchandise (malls), and the green is manufacturing.

I think its not too much a stretch to tell a story about why malls and manufacturing would not be adding additional structures in the wake of the largest fall in retail sales on record.  Here is year-over-year growth in real retail sales. The series changes in 1992 because of discontinuation.

FRED Graph

and of course a lot of that fall in retail aales was cars, still a major part of US manufacturing. Here are car sales yoy

FRED Graph

Now offices. Here the key factor is office vacancy rates. I am going to borrow a chart of this from Bill McBride

We see vacancy rates climbing pretty steadily from 2007 on through 2010. You could make the argument that they were climbing because businesses were not opening or expanding because of uncertainty and to some extent that is the story I would tell.

However, if the uncertainty leveled off in 2010 then it is likely related to the financial crisis. Indeed, I don’t have a chart handy but a lot of the vacancy rise was Finance, Insurance and Real Estate related.

So it doesn’t really seem that the bar business spending went up. They were buying more equipment and software. What went down was structures and those declines seemed closely related to the financial and housing crises and the sharp decline in retail spending.