What does R&D spending mean for the U.S. economy?

Spending on capital equipment has picked up, which should improve U.S. productivity and potentially GDP as well, says Morningstar's Bob Johnson.

Robert Johnson, CFA 10 May, 2016 | 5:00PM

 

 

Bob Johnson: This week’s chart focuses on productivity growth and its relationship to R&D spending. First of all, let’s look at productivity growth.

You can see over the last 20 years that it's varied widely between about zero and 4%, influenced strongly by economic cycles, but the long-term average is about 2% and showing some trending down.

Looking at how that relates to R&D spending is also a critical issue. It’s one of the key drivers of productivity. You can see that R&D spending when its high, we tend to have very good productivity growth and when it’s low we don’t have such great productivity growth. Makes a lot of sense. We invest more in equipment, you figure out a better way to do things, you improve productivity.

So, now you can see that during the Great Recession, those years say from 2009 and then continuing on for a couple of years into 2011 we had very low R&D spending; corporations were very afraid to spend money. And that showed up in very low productivity growth in 2014 and 2015.

The good news is that R&D spending on capital equipment has returned with a vengeance. That should drive productivity growth over the next two or three years considerably higher, which in turn should improve the GDP potential as well. 

About Author

Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.