13 March 2016
US companies are sitting on piles of cash. And the Fed has held interest rates close to zero almost since the start of the Great Recession. And yet companies seem very reluctant to invest. The reason is not far to seek as I mentioned in a previous post Loan Growth During and After Recessions
If consumption were absolutely flat companies would invest just enough to replace worn out fixed capital. It is only when consumption is growing that companies invest more than this. And when, as during and after a recession, consumption has fallen companies would not even seek to replace depreciated capital. This was what Paul Samuelson wrote about in his famous accelerator paper of 1939. Investment in Period t is a function of consumption in Period t-1.
The graph below shows YoY change in Private Nonresidential Fixed Investment v/s YoY change in Personal Consumption Expenditure. There can be little doubt that it agrees with Samuelson's equation.
And why are consumers not consuming? I have explained in great detail in my book Macroeconomics Redefined