A recent report by Deloitte analysts Monali Samaddar and Dr. Daniel Bachman discusses the potential level of business investment that could be waiting for the U.S. economy once COVID-19 is no longer a daily concern. The two based their projections by studying the impact previous recessions had on business investment during their recovery phases.
“While this recession is very different from those before it, looking at the past will give us a better idea of how businesses might behave once the worst is behind us,” says the report.
Samaddar and Bachman explain that businesses regularly begin investing as early as three months after a recession has ended. On average, it takes more than two years for investment to reach pre-recession levels, but recent recoveries experienced much weaker rebounds. It took 51 months for business investment to recover after the recession of 2007-09.
“Given the nature and scale of disruption and the accompanying uncertainty of the current downturn, investment is unlikely to pick up swiftly and may take a longer time to eventually return to pre-COVID-19 levels,” the report says.
Focusing on the three most recent recessions, Q4 2007-Q2 2009, Q1 2001-Q4 2001 and Q3 1990-Q1 1991, the pair looked at three major categories of investment: structures, equipment and IP.
In the past three downturns, investment in structures has been the slowest of the three categories to bottom out, a worrying stat for anyone watching the commercial real estate space. The average decline in quarterly growth rate of manufacturing structures, commercial/health care structures and “other” non-residential structures was over 5 percent during the last recession. None of those categories experienced had posted a positive quarterly growth rate of more than 4.2 percent two years after the worst of the recession.
Investments into transportation and industrial equipment has suffered badly in the past three recessions. Transportation has tended to recover quickly after downturns, but industrial not so much, possibly the result of industrial’s decreasing role in total equipment investment.
“Investments in this area are likely to fall in the current recession and recover weakly afterward,” says the report.
Investments into IP, buoyed as they are by long-term demand and relatively easy financing, have generally been less impacted by recessions. The past two were especially hard on software and R&D, the latter of which has experienced especially slow growth. Investment into software and entertainment products both bounced back quickly after 2007-09.
Samaddar and Bachman explain that a possible boon to investment (and hopefully to a severely disrupted commercial real estate sector) could be coming in the form of increased domestic production capacity, something some policy makers have suggested as a means of reducing the country’s reliance on foreign sources.
Considering the cost of U.S. labor, it may be unlikely that investors will be increasing domestic production to any notable degree, but it’s safe to assume any additional capital that makes its way into the American economy in the coming months will be greeted with open arms.