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In Wamego, Kan., Caterpillar Inc. is doing something that would surprise most people in this depressed economic time: It is adding 40,000 square feet to an already large factory complex to expand production of construction and earthmoving equipment. The project will enable the company to increase its workforce there by about 120, to 500 workers.

Why surprising? Because there’s a widespread misperception that businesses, particularly big ones, are just sitting on huge piles of cash ("US firms hoarding $2 trillion" http://www.nypost.com/p/news/business/hoarding_cash_Yzfk2c8aK1wAPrZCRd
EVnJ) and neither investing it in plants, equipment or software nor hiring additional workers. The lack of hiring is mostly right. The belief that there’s little investment is totally wrong.

Since the middle of last year, business investment in structures, equipment and software has been responsible for half the nation’s economic growth. In the second quarter of this year, the latest figures available, such spending accounted for 1 percentage point of the weak 1.3 percent rate of increase in GDP, the Bureau of Economic Analysis reported last week. In other words, more than three quarters of the growth in the economy in that quarter was due to business investment.

Between June of 2010 and this June, capital expenditures or “capex,” as many analysts call it, surged by 10 percent. No other part of the economy has been nearly so strong. Unfortunately, such spending is only about one-tenth of the total economy and thus cannot by itself lift the country out of its doldrums.

Caterpillar’s August announcement of the Kansas project said the company plans to invest about $3 billion around the world this year to expand its production capacity, “with about half of that invested at its operations in the United States.”

But expanding capacity is not what’s driving most business investment these days, according Jerry Jasinowski, an economist and business consultant who formerly headed the National Association of Manufacturers.

“As I talk to people in manufacturing, they tell me they are not spending it on increases in capacity,” Jasinowski told The Fiscal Times. “They are spending it on maintenance, modernization, software and other things to improve the supply chain. It’s a move to ‘lean’ manufacturing to try to improve operations. Along with exports, that is the thing that has driven manufacturing this year more than anything else.”

Jasinowski expects capex to remain healthy, more so than the overall economy. “I think we are going into a 2 percent growth period or less,” he said, and the executives whom he sees are not looking for anything better.

Economist Robert V. DiClemente of Citigroup has a similar forecast for 2012 -- 2 percent growth with capex rising at about a 5 percent pace, he told his clients last week.

Meanwhile, reports on new orders for durable investment goods, excluding aircraft and defense equipment, showed further strong gains in both July and August. Booming shipments of such goods suggest that “growth in spending on equipment and software in GDP may be running at a 15 percent annual rate this quarter,” DiClemente said.

Macroeconomic Advisers, the St. Louis forecasting firm, has a similar business investment figure in its outlook for next year and an even stronger 8.3 percent gain forecast for 2013.

If those forecasts turn out to be correct, capex will be a steadily rising share of the economy, fostering continued productivity growth.

One factor undoubtedly encouraging businesses to invest more even when overall demand is weak is the ease with which they can obtain financing. That’s not true for smaller businesses unable to tap the bond market. For the most part, such firms have to turn to banks, which in the wake of the financial crisis lending standards are far tighter than in the past.

It’s remarkable how little this surge in capex has been noticed, particularly since without it, growth this year might have vanished altogether. Moreover, the rapid rise has lasted too long to be dismissed as a statistical quirk.

And the reality certainly flies in the face of assertions from some politicians that businesses aren’t investing (*) because of the great uncertainties created by new regulations, possible tax increases and the impact of government imposed health care costs.

Economist Lawrence Mishel of the Economic Policy Institute, a left-leaning Washington think tank, addresses this in an EPI briefing paper, “Regulatory Uncertainty,” published last month. Mishel argues that business investment is not only increasing strongly, but that by one measure it is doing better than during either of the expansions that followed the 1990-91 and 2001 recessions, and doing as well as it did following the deep 1981-82 slump.

That measure is business investment in equipment and software as a share of GDP.

“The data show that investment has increased more in this recovery than in the prior two recoveries and roughly the same as that of the 1980s recovery,” Mishel says. It does not appear to be being held back by worry about regulation.

Unfortunately, data don’t have much of an impact on politicians’ arguments these days.

In Wamego, Kan., Caterpillar Inc. is doing something that would surprise most people in this depressed economic time: It is adding 40,000 square feet to an already large factory complex to expand production of construction and earthmoving equipment. The project will enable the company to increase its workforce there by about 120, to 500 workers.

Why surprising? Because there’s a widespread misperception that businesses, particularly big ones, are just sitting on huge piles of cash and neither investing it in plants, equipment or software nor hiring additional workers. The lack of hiring is mostly right. The belief that there’s little investment is totally wrong.

Since the middle of last year, business investment in structures, equipment and software has been responsible for half the nation’s economic growth. In the second quarter of this year, the latest figures available, such spending accounted for 1 percentage point of the weak 1.3 percent rate of increase in GDP, the Bureau of Economic Analysis reported last week. In other words, more than three quarters of the growth in the economy in that quarter was due to business investment.

Between June of 2010 and this June, capital expenditures or “capex,” as many analysts call it, surged by 10 percent. No other part of the economy has been nearly so strong. Unfortunately, such spending is only about one-tenth of the total economy and thus cannot by itself lift the country out of its doldrums.

Caterpillar’s August announcement of the Kansas project said the company plans to invest about $3 billion around the world this year to expand its production capacity, “with about half of that invested at its operations in the United States.”

But expanding capacity is not what’s driving most business investment these days, according Jerry Jasinowski, an economist and business consultant who formerly headed the National Association of Manufacturers.

“As I talk to people in manufacturing, they tell me they are not spending it on increases in capacity,” Jasinowski told The Fiscal Times. “They are spending it on maintenance, modernization, software and other things to improve the supply chain. It’s a move to ‘lean’ manufacturing to try to improve operations. Along with exports, that is the thing that has driven manufacturing this year more than anything else.”

Jasinowski expects capex to remain healthy, more so than the overall economy. “I think we are going into a 2 percent growth period or less,” he said, and the executives whom he sees are not looking for anything better.

Economist Robert V. DiClemente of Citigroup has a similar forecast for 2012 -- 2 percent growth with capex rising at about a 5 percent pace, he told his clients last week.

Meanwhile, reports on new orders for durable investment goods, excluding aircraft and defense equipment, showed further strong gains in both July and August. Booming shipments of such goods suggest that “growth in spending on equipment and software in GDP may be running at a 15 percent annual rate this quarter,” DiClemente said.

Macroeconomic Advisers, the St. Louis forecasting firm, has a similar business investment figure in its outlook for next year and an even stronger 8.3 percent gain forecast for 2013.

If those forecasts turn out to be correct, capex will be a steadily rising share of the economy, fostering continued productivity growth.

One factor undoubtedly encouraging businesses to invest more even when overall demand is weak is the ease with which they can obtain financing. That’s not true for smaller businesses unable to tap the bond market. For the most part, such firms have to turn to banks, which in the wake of the financial crisis lending standards are far tighter than in the past.

It’s remarkable how little this surge in capex has been noticed, particularly since without it, growth this year might have vanished altogether. Moreover, the rapid rise has lasted too long to be dismissed as a statistical quirk.

And the reality certainly flies in the face of assertions from some politicians that businesses aren’t investing because of the great uncertainties created by new regulations, possible tax increases and the impact of government imposed health care costs.* (see below)

Economist Lawrence Mishel of the Economic Policy Institute, a left-leaning Washington think tank, addresses this in an EPI briefing paper, “Regulatory Uncertainty,” published last month. Mishel argues that business investment is not only increasing strongly, but that by one measure it is doing better than during either of the expansions that followed the 1990-91 and 2001 recessions, and doing as well as it did following the deep 1981-82 slump.

That measure is business investment in equipment and software as a share of GDP.

“The data show that investment has increased more in this recovery than in the prior two recoveries and roughly the same as that of the 1980s recovery,” Mishel says. It does not appear to be being held back by worry about regulation.

Unfortunately, data don’t have much of an impact on politicians’ arguments these days. http://www.thefiscaltimes.com/Columns/2011/10/04/Businesses-Prime-the-
Pump-for-a-Big-Growth-Spurt.aspx#page1, they got that last part right!

* Regarding that "assertions from some politicians that businesses aren’t investing because of the great uncertainties created by new regulations, possible tax increases and the impact of government imposed health care costs":

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Listen to just about any speech by a Republican presidential hopeful, and you’ll hear assertions that the Obama administration is responsible for weak job growth. How so? The answer, repeated again and again, is that businesses are afraid to expand and create jobs because they fear costly regulations and higher taxes. Nor are politicians the only people saying this. Conservative economists repeat the claim in op-ed articles, and Federal Reserve officials repeat it to justify their opposition to even modest efforts to aid the economy.

The first thing you need to know, then, is that there’s no evidence supporting this claim and a lot of evidence showing that it’s false.

The starting point for many claims that antibusiness policies are hurting the economy is the assertion that the sluggishness of the economy’s recovery from recession is unprecedented. But, as a new paper by Lawrence Mishel of the Economic Policy Institute documents at length, this is just not true. Extended periods of “jobless recovery” after recessions have been the rule for the past two decades. Indeed, private-sector job growth since the 2007-2009 recession has been better than it was after the 2001 recession.

We might add that major financial crises are almost always followed by a period of slow growth, and U.S. experience is more or less what you should have expected given the severity of the 2008 shock.

Still, isn’t there something odd about the fact that businesses are making large profits and sitting on a lot of cash but aren’t spending that cash to expand capacity and employment? No.

After all, why should businesses expand when they’re not using the capacity they already have? The bursting of the housing bubble and the overhang of household debt have left consumer spending depressed and many businesses with more capacity than they need and no reason to add more. Business investment always responds strongly to the state of the economy, and given how weak our economy remains you shouldn’t be surprised if investment remains low. If anything, business spending has been stronger than one might have predicted given slow growth and high unemployment.

But aren’t business people complaining about the burden of taxes and regulations? Yes, but no more than usual. Mr. Mishel points out that the National Federation of Independent Business has been surveying small businesses for almost 40 years, asking them to name their most important problem. Taxes and regulations always rank high on the list, but what stands out now is a surge in the number of businesses citing poor sales — which strongly suggests that lack of demand, not fear of government, is holding business back.

So Republican assertions about what ails the economy are pure fantasy, at odds with all the evidence. Should we be surprised?

At one level, of course not. Politicians who always cater to wealthy business interests say that economic recovery requires catering to wealthy business interests. Who could have imagined it?

Yet it seems to me that there is something different about the current state of economic discussion. Political parties have often coalesced around dubious economic ideas — remember the Laffer curve? — but I can’t think of a time when a party’s economic doctrine has been so completely divorced from reality. And I’m also struck by the extent to which Republican-leaning economists — who have to know better — have been willing to lend their credibility to the party’s official delusions.

Partly, no doubt, this [u\]reflects the party’s broader slide into its own insular intellectual universe. Large segments of the G.O.P. reject climate science and even the theory of evolution, so why expect evidence to matter for the party’s economic views?

And it also, of course, reflects the political need of the right to make everything bad in America President Obama’s fault. Never mind the fact that the housing bubble, the debt explosion and the financial crisis took place on the watch of a conservative, free-market-praising president; it’s that Democrat in the White House now who gets the blame.

But good politics can be very bad policy. The truth is that we’re in this mess because we had too little regulation, not too much. And now one of our two major parties is determined to double down on the mistakes that caused the disaster. http://www.nytimes.com/2011/09/30/opinion/krugman-phony-fear-factor.ht
ml?_r=1

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So, shall those of us with brains now dump that misconception, and leave it to those for whom it sings the right song? They'll never stop saying it, remember, just also remember it's hyperbole.