Business spending is the issue of the day. Businesses had so much inventory and capacity that they have had, and are having, a terrible time getting rid of it. Industrial over capacity is a huge problem that isn’t going to clear up for awhile. As I drive down the road, I see empty buildings, lots of them. I can’t see building more business space in the bay area for awhile, a long while. Rents have dropped 50% in SF so why would a company build a new building? The program is sound economic policy of lowering interest rates to spur business and consumer spending. But business overspent so much in the last boom, they still don’t need to spend.
In fact, where would they spend? Space and capacity are overbuilt, software was all updated in Y2K, and the next big thing has yet to be determined. We all have cell phones, computers, cars, houses, etc. What do we need in a rapidly increasing way? Where would you spend R&D money except drugs and health?
The minute the rate cut idea was floated, there was significant pressure on the European Central bank to cut rates also. They did so to the tune of 50 bps. The bond market and stock markets reacted favorably and the issue of deflation was put on the back burner. Deflation is a real killer and if a rate cut can put in our minds that the fed will do whatever they have to in order to avoid it, its worth it.