For some time we’ve argued that the main culprit behind notably weak productivity growth over the course of the current expansion has been underinvestment on the part of firms. Investment had been so weak for so long that not only is the size of the capital stock an issue, but so too is its age, with each factor spawning inefficiencies that hold down productivity growth.
The data show a reversal in this pattern beginning in early 2017, prior to the 2017 tax bill, and our thought is that the bill only adds to firms’ incentives to upgrade their capital stocks. While a weak print on business investment in the third-quarter GDP data has led some to declare the tax bill “a bust”—a nonsensical statement—we think there’s still upside room for more business investment. Some firms must agree, having already stepped up spending on R&D, which typically leads improvements in productivity growth by several quarters.