The FOMC has expressed concern about the continued declines in this spending category. Business spending on new plant and equipment represents a significant share of overall spending, and its importance has increased in recent years. The sudden reversal in this trend is one of the major stories behind the current growth slowdown. Looking ahead, we need a healthy pace of growth in business investment spending to achieve a sustainable pace of growth in overall demand. This will take time, as I am sure you in this audience can appreciate.
Businesses invest in new plant and equipment basically to improve efficiency or build capacity.
While the pressure to improve efficiency is relentless, the need to add capacity is not. Until businesses see convincing signs of a reacceleration in overall demand, they will not ramp up their investment spending to add capacity. Indeed, historically, when there is an acceleration in overall economic growth, it is led by consumer spending, and then later amplified by business investment. The third part of the assessment offered by the FOMC that warrants our attention today concerns the risks to the outlook for continued growth. The FOMC continues to believe that the risk is tilted toward continued weakness in the economy.