South-Westerns' Economic News Summaries
Will Business Fuel U.S. Growth?
Topic Productivity and Growth
Key Words Business Spending and Economic Growth

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Reference ID: A140292286
News Story

Economic forecasters and weathermen are notorious for missing their predictions, but as home construction and home sales begin to fall, most analysts are suggesting that another sector will pick up the slack. “I think the surprise will be that housing prices and housing sales will decelerate, but the economy will do just fine," said Richard Berner, chief domestic economist for Morgan Stanley.

The main candidate for the new economy driver mentioned by most economy watchers is business spending, which they say will be kicking in by 2006. Business spending--or investment, as economists call it—is spending on new capital goods and equipment needed for production.

Business spending has accelerated in the spring and summer months and is now expected to rise even further. Corporate America has finally begun to replace their aging and outdated equipment with new and more productive machinery. Business confidence is rising as the economy continues on a growth path that has produce record profits for many firms.

“Business has tons and tons of capability to spend,” said Minneapolis-based chief investment strategist at Wells Capital Management James W. Paulsen, “The longer the recovery keeps going and stock prices go up, the more confident business is going to become and the more it will spend on its operations.”

In a survey of chief financial officers sponsored by Baruch College and Financial Executives International, two-thirds of respondents revealed that their companies would be increasing investment spending on capital goods by 8 or 9 percent in 2006. Aggregate demand increased in 2005, allowing firms to profit. Rapid inventory depletion has occurred since July and should prompt retailers and wholesalers to restock their shelves and warehouses. These orders will result in further demand increases, prompting manufacturers to invest in productive capacity.

Finally, at the state level, budget surpluses are driving increased public spending and adding one more dimension to the already-increasing aggregate demand. The result of all these various factors, led strongly by business investment, is an economy that is expected to grow by as much as 3.5 percent in 2006.

Questions
1.

How do economists define the term “investment”?

2. Discuss the impact of increasing investment on aggregate demand.
Source Louis Uchitelle, “U.S. Growth May Hinge on Business”, The New York Times Online, December 30, 2005.
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