Capital Spending Still Continues to Decline

Economic growth during last year's final three months wasn't widespread. The marginal gain in GDP could be attributed entirely to a surge in growth in the consumer sector, and to sharply increased levels of government spending, much of it for national defense and homeland security. Consumer spending on nondurable goods and services grew at annualized rates of less than 1.5% during 2001's final quarter, but a surge in spending for durable goods, particularly motor vehicles, pushed growth to its highest level in almost two years.

At the same time, business investment plummeted. Annualized rates of spending for new equipment and buildings fell at a steeper rate during the fourth quarter of last year than in the third quarter. Further, the continued reduction of inventories was severe enough in itself to subtract 2.2% from the change in fourth-quarter GDP.

Capital spending for new equipment and software declined at a 5.2% annualized rate during the final three months of 2001. But this decline was less than had been expected, giving rise to hopes that business investment of this sort may begin to expand again by the final quarter of 2002. Equipment and software capital spending plunged by rates of 15.4% and 8.8% during the second and third quarters, respectively, of 2001. But business investment in construction and renovation of buildings plummeted during the final three months of last year as employment fell and vacancy rates skyrocketed.