Investment Spending and the U.S. Economy

Investment Spending and Worker Productivity

The economy of a country entails more than the sum of every individual’s economic status. In essence, a country’s economy is a collection of the transaction and values beyond a person’s actual cash in hand (Smyth, 2019). Investment spending and labor productivity are some of the factors that shape the economy of a country. An investment is a term used to refer to money or resources spent on something with expectations of future benefits. Investment spending can involve dedicating money to bonds, stocks, and shares or even capital spending. On one hand, investment spending enhances the capacity of a business to create its respective goods and services. On the other hand, investment spending back into the economy stimulates the growth and productivity of the national economy. Worker productivity refers to the number of products and services produced by a group of workers in a specific time period.

There is a positive relation or correlation between investment spending and worker productivity. Investment spending is strongly linked to worker productivity as it affects labor market factors like employment absorption. In this case, an increase in investment spending contributes to an increase in employment absorption, which in turn contributes to increased worker productivity. For instance, Habanabakize, Meyer & Olah (2019) found that a 1% increase in investment spending increased employment absorption and worker productivity by 0.188% and 1% respectively. This primarily implies that higher worker productivity is realized when there is an increase in investment spending. The relation between investment spending and worker productivity has significant economic implications. Increased investment spending increases worker productivity and leads to increased economic growth and productivity. Therefore, the relation between these two components shapes the level of economic growth and productivity of a country.

Recent Investment Spending

Cambon (2021) states that business investment is becoming a powerful tool of economic growth in the United States. As a potent source of economic growth, business investment is one of the factors that is likely to promote and sustain economic recovery in the U.S. One of the recent trends in the U.S. economy is increased investment spending or business investment. The country has experienced an increase in consumer spending that is currently driving the early stages of U.S. economic recovery. Business spending in non-residential fixed investments increased at seasonally adjusted annual rate of 11.7% in the first quarter of 2021 (Cambon, 2021). This increase was fueled by the growth in tech equipment and software spending as businesses started increasing orders for machinery, software, and computers. Moreover, the U.S. has experienced an increase in orders for nondefense capital goods except aircraft.

These recent trends in investment spending differ from those in the aftermath of the 2007-09 economic recession. Unlike the period following the 2007-09 economic recession, recovery in investment spending is much stronger in the current U.S. economy. Following the recession, businesses were more risk-averse and cautious since the recession put them close to the edge. Currently, business investment is largely driven by investing in capital. On the contrary, the period after the recession in 2009 was characterized by the focus on adding workers because hiring was more attractive in comparison to capital spending. Currently, many companies are focusing on investment spending because the supply of employees is tight unlike in the aftermath of the 2007-09 recession. Despite the differences between business investment spending in the two periods, they were both fueled by a positive outlook. Similar to the aftermath of the 2007-09 recession, current investment spending trends are fueled by a positive economic outlook and projected economic growth and productivity.

Economic Uncertainty and Lower Investment Spending

The relationship between economic uncertainty and investment spending has been the subject of numerous studies in recent years. One of the popular notions on this issue is the idea that economic uncertainty usually leads to lower investment spending. This idea is supported by the fact that uncertainty has been found to have negative impacts to and damages the economy. Economic uncertainty has become rampant in the recent past due to the COVID-19 global pandemic and subsequent policy responses. Individuals, organizations, and governments across the globe face uncertainty because the pandemic has made life much more difficult and affected the global economy. As uncertainty continues to grow, there is huge research evidence showing that it will continue to have negative impacts on the economy. In essence, the disruption brought by the pandemic is expected to damage the economy.