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.

Short Term Perspective

Nominal (current dollar) business fixed investment was moderate in the third quarter with a 2.1 percent rise, following a 2.6 percent increase the prior quarter. Cash flow worsened in the third quarter with a 4.2 percent decline, following a 4.0 percent gain in the second quarter. Typically, one can look at cash flow as the income necessary to spur capital spending. The softening in cash flow recently suggests a slowing in the pace of investment spending.