Pig’s Eye View: Capital Trends (Updated)

Brad DeLong described the “pig” economist as someone who dives into the details of the economy and wallows around in it until he gets some insight about what is happening. Meanwhile, Nick Rowe is wondering whether we are moving closer or father from being an “apple” economy. This post is a pig’s response.

Upside Down V

This first thing to note is the “V” shape in the capital-output ratio, from the mid-60s until the present day, with the peak occurring around 1982. The following Fred graph measures the tangible assets of non-farm non-financial businesses as a proportion of GDP.

Non-Financial Business Tangible Assets/GDP

Tangible assets consist of equipment and software together with real estate, with real estate the more volatile component (primarily due to valuation swings):

Non-Financial Business Real Estate Assets/GDP

Whereas the trend in equipment and software, which are not subject to the same valuation swings, is more clear, particularly when we normalize by potential GDP:

Non-Financial Business Equipment and Software/Potential GDP

Meanwhile, the gap between gross and net output is widening. I.e. a greater share of gross output consists of capital consumption:

Consumption of Fixed Capital/GDP

A different story emerges if we look at the financial assets of non-financial businesses, normalized by GDP:

Financial Assets of Non-financial businesses

Note that this data comes from Z.1, and presumably includes goodwill, purchased patents and copyrights, etc, but I couldn’t find confirmation for this digging around the Fed’s website (and for some reason they can’t put the handbook online!). If anyone can verify, please let me know.


As an alternate measure, we can use the BEA Fixed Asset Stock tables. I used the quantity index of private equipment and software, and compared this to potential real GDP.  Note that we are using two different indexes with different bases, but we can still compare the growth rate of one with the growth rate of the other. This series ends in 2009 and is only available annually.

Also note that computing quantity indexes is difficult for software and technology components: just because MS office has 10 times more features does not mean that 10 times the quantity has been supplied over the previous version, or that firms purchasing MS Office for their workers are making 10 times the capital investment that they were making when they purchased the previous version. You can imagine a pareto distribution of feature-use, with the most obscure features used very rarely by a handful of customers, etc. Similarly, if processors are 1o times faster than 5 years ago, this does not mean that 10 times as many processors were supplied, nor does it mean that this component of the capital stock has increased ten-fold. IMO this is why the BLS has some whacky price deflators for semiconductors and software in comparison to more plausible price deflators for things like capital equipment.




Pig’s Eye View: Capital Trends (Updated)

7 thoughts on “Pig’s Eye View: Capital Trends (Updated)

  1. srini says:

    Yes, financial assets of nonfinancial firms includes goodwill and other intangibles. The most important category is the “asset” that gets created when companies acquire other companies and the difference between the acquisition price and the value of the assets on the books gets recorded as a financial asset to balance the books.

  2. srini says:

    One other point: you are using tangible assets at “replacement cost” whereas if you use tangible assets at historical cost, i.e. what is normally used in financial accounting, you get a vastly different picture. The historical cost is a memo item in Flow Funds in the balance sheet table.

    The rate of inflation for business output has been far greater than the rate of inflation for capital goods. In fact, for equipment and software it has been negative for the past thirty years.

    From my perspective the historical cost has an immediate resonance, It reflects financial commitments and higher the ratio the higher profits have to be to validate those commitments. This also explains why firms require such high profits margins and profits in relation GDP.

    The measure based on replacement cost is problematic. It is neither a real measure, which itself has its own problems nor a measure of capacity constraints, given the capacity utilization numbers from the Fed.

  3. Srini,

    “Yes, financial assets of nonfinancial firms includes goodwill and other intangibles.”

    Yes — but does the Z.1 FoF measure this? I suspect it does, but don’t have confirmation. If you know that it does — can you provide a reference? Thanks!

    “One other point: you are using tangible assets at “replacement cost” whereas if you use tangible assets at historical cost, i.e. what is normally used in financial accounting, you get a vastly different picture. ”

    For equipment and software, the relevant measure is replacement cost, since what we are interested in measuring the current size of the capital stock, not the total of past commitments. And note that the price deflator for capital goods has been flat. But a better time series would be the BEA fixed asset quantity indexes directly, except that those have a 2-3 year lag and are only available on an annual basis, the difference between the two is not going to be large.

  4. Srini,

    I can’t find equipment and software at historical cost for non-corporate business. The data seems to be available only for corporate business.

    1. srini says:


      1) They don’t have historical cost basis for non-corporate business. Only for nonfinancial corporate business.

      2) To make appropriate comparisons, I don’t use GDP, but nonfinancial corporate sector gross value added (from the NIPA) and net value added. That way, not using the non-corporate business does not seriously skew my analysis.

      3) I have serious problems with the real stock of capital published by the BEA–it uses hedonic adjustments which have serious conceptual problems. Even without hedonics, real aggregate capital is a meaningless concept outside of a single capital good world. Replacement value does not suffer from that problems but does not address the idea that capital investment is a financial decision that has to be financially validated.

      4) Yes, i am pretty sure that the miscellaneous assets includes goodwill. If my memory serves me right, i had an exchange with the Fed about this issue several years ago.

  5. Srini,

    I think we are in agreement here, except that I am interested in trying to measure the current stock of capital, and not so interested in the financial commitments. The reason for this is that there are all sorts of reasons to commit or not, and I am interested in the outcome of this decision on the size of the capital stock — and consequently on productivity and labor demand.

    But the rapid growth of intangible assets still remains a puzzle.
    Normalizing by GVA of the corporate sector wont make a big difference here, except that investment by non-corporate business has taken a bigger dive than investment by corporates, if you compare their balance sheets in Z.1

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