August 2, 2016

THE WISDOM OF MARKETS:

To Avoid Recession, Fix the Corporate Tax Code (Diana Furchtgott-Roth, August 1, 2016, Reuters)

The problem was not consumers, who went shopping at the healthiest rate since the fourth quarter of 2014, resulting in an increase in personal consumption expenditures of over 4 percent. The problem was declining domestic investment across the board.

Consider that gross private domestic investment declined by 9.7 percent on an annualized basis from the first quarter of 2016 to the second quarter. Over the past year, it declined by 3.4 percent.


Within the category of domestic investment, second quarter nonresidential structure investments declined by 7.9 percent on an annualized basis relative to the first quarter, and nonresidential equipment by 3.5 percent. Residential investment was lower by 6.1 percent.

American individuals and businesses were reluctant to make investments in the second quarter. The declining investments are all the more remarkable given the Fed's abnormally-low interest rates. The Fed has now held interest rates historically low for several years.

Of course, it's only remarkable if you accept both the false premise--that rates are low--and the idea that consumers were acting against their own best interests on masse.  Instead, simply accept that deflation means that real interest rates are artificially high and that it makes sense to hold off on large expenditures, since they'll be cheaper later, and it is evident that there's nothing remarkable here.

Posted by at August 2, 2016 4:51 PM

  

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