roger w ferguson, jr : factors influencing business investment remarks by mr roger w ferguson, jr, vice - chairman of the board of governors of the us federal reserve system, at the greater issues series, the citadel, charleston, south carolina, 26 october 2004. * * * thank you for inviting me to speak today as part of the citadel ’ s greater issues series. i will speak about one of the forces likely to shape developments in the u. s. economy. in past speeches, i have addressed the so - called jobless recovery, trade, global imbalances, and national saving. today, i round out this series on fundamental issues by reviewing business capital investment - that is, spending by businesses on such things as machines, computers, and new buildings. although it makes up only about 10 percent of gross domestic product, business investment is a vital element of the u. s. economy, with important implications for a variety of broader economic issues. investment has a large influence on the year - to - year fluctuations in economic activity. during the past six recessions, the drop in domestic investment has generally accounted for most of the decline in gdp. business investment was a major factor in both the 1990s economic expansion and the subsequent recession. in fact, the decline in business outlays on investment goods in 2001 was even larger than the downturn in the overall economy. although overall gdp edged down at an average annual rate of only 0. 2 percent in the first three quarters of 2001, the decline in business investment subtracted nearly 2 percentage points from gdp growth over that period. clearly, some insight into investment swings would enable us to better understand the economic cycles of recessions and expansions, which in turn have such a big effect on job creation, the budget deficit, and a host of other important issues. business investment also affects the broader economy through labor productivity - or output per hour of work. over the past fifty years, the average hourly output of american workers has increased nearly 200 percent. according to the bureau of labor statistics, more than one - third of this improved efficiency likely reflects increases in the use of capital goods. over the past decade, efficiency gains due to increased capital expenditures have been especially pronounced. because rising productivity is the primary means through which standards of living increase, capital investment is clearly an important part of the economic engine. accordingly, an understanding of investment is critical for insight into both cyclical and longer - run economic developments. in my discussion today, i want

income and thus consumption. in addition, external as well as domestic demand should increasingly benefit from the effects of the significant macroeconomic stimulus under way as well as from measures taken to restore the functioning of the financial system both inside and outside the euro area. taking these effects into account, we see the risks to this outlook for economic activity as being broadly balanced. on the one hand, there may be stronger than anticipated positive effects due to the decrease in commodity prices and to policy measures taken. on the other hand, there are concerns that the turmoil in financial markets could have a stronger impact on the real economy, as well as that protectionist pressures could intensify and that there could be adverse developments in the world economy stemming from a disorderly correction of global imbalances. annual hicp inflation has fallen further, from 1. 2 % in february to 0. 6 % in march, according to eurostat's flash estimate. as explained on earlier occasions, the decline in inflation since last summer primarily reflects the sharp fall in global commodity prices over this period. moreover, signs of a more broad - based reduction in inflationary pressure are increasingly emerging. looking ahead, base effects stemming from past energy price effects will play a significant role in the shorter - term dynamics of the hicp. accordingly, we expect to see headline annual inflation rates declining further in the coming months and temporarily reaching negative levels around mid - year. thereafter, annual inflation rates should increase again. such short - term movements are, however, not relevant from a monetary policy perspective. looking further ahead, over the policy - relevant horizon, annual hicp inflation is expected to remain below 2 % in 2010, reflecting mainly ongoing sluggish demand in the euro area and elsewhere. available indicators of inflation expectations over the medium to longer term remain firmly anchored in line with the governing council's aim of keeping inflation rates at levels below, but close to, 2 % over the medium term. the risks surrounding this outlook are broadly balanced. they relate in particular to the risks to the outlook for economic activity as well as to risks to commodity prices. turning to the monetary analysis, the latest data confirm the high month - to - month volatility of developments in m3 and its components observed since the intensification of the financial turmoil in september 2008. looking through this volatility, the pace of monetary expansion in the euro area has continued to decelerate markedly and supports the assessment of diminishing risks to price stability in the