January capital goods orders beat expectations (+1.7% vs. -0.2%), but they've been relatively flat for the past year. Plus, as the chart above shows, orders in real terms are still some 20% below their 2000 peak, and nominal orders are only marginally higher than they were 14 years ago. We're talking sluggish business investment for more than a decade, and that's one good reason why economic growth has been sluggish in the current recovery. Capex is the seed corn of future productivity growth, so without some meaningful gains in this key variable we are unlikely to see economic growth exceed 2-3% per year.
The lack of stronger business investment in capital goods is notable given the very strong growth of corporate profits, as the chart above suggests. Corporate profits after tax are now at all-time highs, both nominally and relative to GDP, having more than tripled since 2000, from $520 billion to $1.7 trillion.
How to explain this? One explanation is simply that the meager gains in business investment are a reflection of an enduring lack of confidence, something that has been a major feature of the current recovery. Households, banks and businesses have all been quite risk averse since the calamitous 2008-2009 recession. Another explanation is that U.S. corporations have faced the highest tax rate on profits of any developed country, which helps explain why businesses are keeping more and more profits overseas and have declined to repatriate as much as $2 trillion in foreign profits. A mere 70 U.S. companies are holding $1.2 trillion in profits overseas, according to a recent Bloomberg analysis.
The key to unlocking the growth potential of this mountain of corporate profits is adopting more business-friendly policies (e.g., cutting regulatory burdens) and cutting corporate income tax rates to a level that makes corporations indifferent to keeping profits overseas or repatriating them. How much longer can Congress ignore the growth-stifling distortions of our tax code and the deadweight loss of our regulatory burdens?