Long Term Perspective

Cash flow is to business investment what income is to consumption expenditures. For a long time – between 1996 and 1999 – business fixed investment grew more rapidly than cash flow. The imbalance could not continue forever. Cash flow improved in 1999 and part of 2000 so that the growth of these two series were in better alignment. By the end of 2000, cash flow dropped more than business fixed investment once again suggesting that business fixed investment would weaken – and it did. Cash flow improved between 2001 and 2003, moderated in 2004 but generally improved in 2005 before weakening in 2007 and 2008 and into 2009.  But businesses have slashed costs and revenues are gradually improving.  As a result, cash flow was more positive in 2009 and in the first half of 2010.  There was some softening in latter 2010 through late 2014.

 

 

Short Term Perspective

In 2012 there was weakness in cash flow and business fixed investment was sluggish as businesses became wary of slowing economic growth and grew increasingly concerned about fiscal cliff issues. But there was on and off improvement in cash flow during 2013 and 2014.  In the third quarter of 2014, cash rose 2.3 percent after rebounding a quarterly 6.9 percent the prior quarter.

 

Nominal (current dollar) business fixed investment in the fourth quarter rose a quarterly 1.2percent, following 2.4 percent in the third quarter (not annualized). Typically, one can look at cash flow as the income necessary to spur capital spending. After moderate cash flow in recent quarters, cash flow has been wavering. Investment is still modestly positive.