Capital Overhangs

Has Equipment Investment Spending Suffered from a Hangover?

Jonathan McCarthy

Jonathan McCarthy is an economist at the Federal Reserve Bank of New York, a post he has held since September 1992. He was a visiting economist at the Bank for International Settlements in Basel, Switzerland, in 1997- 98. He received his Ph.D. in economics from the University of Wisconsin-Madison in 1992.

This paper examines the role of capital equipemnt overhangs in recent investment fluctuations using a measure based on the Jorgenson neoclassical model of investment. This measure has several advantages over capacity utilization—in particular, wider coverage of the economy and better predictive power for equipment spending. According to our measure, the overhang in aggregate equipment was surprisingly modest in 2000- 01, and it has been worked off so that there currently may be an aggregate equipment shortage. Looking at types of equipment, there continue to be notable overhangs in communications and transportation equipment. Estimating the historical relationship between overhangs and investment growth, the effect is generally modest. Consequently, overhangs may have held back aggregate capital spending modestly in 2000-01 but have little effect presently outside of small impacts on communications and transportation equipment.

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