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Snapshot for March 3, 2004.
Increase in hi-tech investment obscures weakness in overall manufacturing
On the surface, the strong recovery in overall business investment could be seen as the most encouraging news to come from the Commerce Department’s recent reports on gross domestic product (GDP) in the third and fourth quarters of 2003. In the third quarter, nonresidential investment rose 12.8%, while in the fourth it rose 9.6%.
Since the 2001 recession was caused by a collapse in investment demand, this uptick was welcome news. Furthermore, manufacturing employment relies heavily on investment demand because much manufacturing output consists of capital goods for other businesses. Since manufacturing employment has declined for 42 straight months, an investment recovery would be most beneficial for this sector as well.
However, looking more closely at the data for industrial production and capacity reveals that the investment increase, while real, is extremely unbalanced. The chart below shows that hi-tech industries—the only true bright spot—are booming, with industrial production and capacity rising 24.6% and 11.1%, respectively, over the past year.
The bad news, however, is that manufacturing industries besides hi-tech continue to stagnate. Industrial production has grown only 0.9% in the past year, while industrial capacity actually declined -0.2%. This marks the 19th straight month of year-on-year decline in industrial capacity for manufacturing excluding hi-tech. Before this latest period, the last time this grouping posted a year-on-year decline was in January 1984.
Ultimately, the acid test of business confidence is growth in capacity. If businesses anticipate greater demand for their output in the near-term, they need to invest in capacity and hire new employees. These current numbers suggest that business confidence in mainline manufacturing—which still employs 94% of all manufacturing workers—remains weak.
This week’s snapshot was written by EPI economist Josh Bivens.