The Case of the Missing Investment

The first quarter GDP report shows that the supply-side of the economy is hurting from anti-growth policies

WSJ editorial.

"You could hear the relief on Wall Street as economic data released Thursday suggested the U.S. isn’t slipping into recession—yet. Inspect the quarterly gross-domestic-product numbers more closely, however, and the U.S. remains in the woods rather than out of them.

Inflation-adjusted growth of 1.1% on an annual basis was lower than many economists predicted. Investors’ optimism as measured by relief in the stock market arises in part because falling inventories contributed an outsize share to the decline in growth from 2.6% in the previous quarter. If consumption remains as robust as it was in this quarter—growing 3.7% from the previous quarter—businesses may have to boost production this year to keep up.

Yet inventories weren’t the only weak spot, and far more troubling is the slowdown in private investment. Gross private domestic investment fell 12.5% in the quarter, driven by declines in business equipment (down 7.3%) and residential housing (down 4.2%). This tells a worrying story about economic policy. A characteristic of the post-pandemic recovery has been that business investment often hasn’t kept pace with robust consumer demand, and now it looks like investment might fall behind again.

This runs counter to the theory Keynesians used to sell their pandemic-era spending blowouts—that stoking demand would stimulate more supply. It hasn’t. The Biden Administration and its economic muses first blamed “supply-chain disruptions” and then the war in Ukraine for this supply-side dysfunction. 

The next scapegoat will be March’s bank panic, which at least is more plausible than the previous excuses. As deposits have shifted out of regional banks into too-big-to-fail institutions and money-market funds, smaller businesses especially may start experiencing difficulty tapping credit from their local banks.

All the more reason, then, for the Administration and Congress to focus on supporting productive business investment—which they’ve failed to do. Democrats say the Inflation Reduction Act will stimulate a new investment bonanza. But that will only be for a narrow cohort of favored green businesses. Everyone else will pay higher taxes and much higher energy prices while facing tighter regulation on environmental and many other grounds—on top of higher interest rates. The wonder is that business investment hasn’t fallen further.

One quarter’s GDP data rarely say anything definitive, but this quarter’s report brings into focus the policy battle to come. Absent supply-side tax and regulatory relief from elected politicians, pressure will mount on Federal Reserve Chairman Jerome Powell to surrender to inflation and cut interest rates.

What a mistake that would be. Inflation poses the biggest threat to consumer demand, which has been keeping the U.S. out of recession. The country awaits a new voice making the case for a politics of economic growth, rather than income redistribution."