Economic snapshot | Trade and Globalization

The foundation for future growth

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Snapshot for November 24, 1999

The foundation for future growth

Although the United States is admired the world over for the strength of its economy, the stock market’s record growth since 1994 has meant a drain on corporate resources. Firms are dedicating an increasing amount of their resources to stock repurchases and to dividend payments, thereby leaving less for new investments in plants and equipment, and hence eroding the foundation for sustained growth in the future.

America’s corporations show a less-than-stellar investment performance. For the current business cycle, net investment out of total internal funds has hovered around an 11% average, which is marginally more than the 9% average for the last business cycle. But these last two business cycles pale when compared with the 30-40% net investment outlays out of total internal funds of the previous post-war business cycles (see the figure below).

For car manufacturers, net capital stock as a percentage of assets has decreased from 29% at the peak of the last business cycle (1990) to 23% by mid-1999. Similarly, the net capital stock of aircraft manufacturers has declined from 22% to 16%. Even so, sluggish investment is not a phenomenon unique to the “old industries.” The “new industries,” such as computers or medical equipment, do not necessarily invest more. The net capital stock of the electric and electronic equipment manufacturing sector has declined from 22% to 18%, and that of the high-tech instruments manufacturing sector has dropped from 25% to 18%.

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