This chart shows the net stock of fixed assets for both the public and private sectors.  We have log transformed the data and de-trended both series.  In general, a reading over zero indicates the net stock of fixed assets is above its long-term trend and vice versa.  Note that public sector assets were above trend from 1940 into the mid-1990s.  This was mostly due to elevated Cold War defense spending.  During this period, private sector fixed asset levels tended to remain under trend, although a surge that began in the mid-1960s did eventually lead to a rise above trend.  Note that the surge of both public and private spending on fixed assets in the 1970s probably led to crowding out and higher inflation.

Current conditions suggest that both private and public sector investment are well below trend.  In general, private sector investment tends to have a greater impact on future growth and would thus be preferred.  However, given an environment of weak asset formation from both sectors, the economy would likely benefit from increased investment in either sector.  Thus, promises of increased spending on infrastructure and defense would likely have a positive effect on the economy and be positive for equity markets.

Bill O’Grady is an Executive Vice President at Confluence Investment Management, a participant in the ETF Strategist Channel.

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Past performance is no guarantee of future results.  Information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice or a recommendation. The investment or strategy discussed may not be suitable for all investors.  Investors must make their own decisions based on their specific investment objectives and financial circumstances.  Opinions expressed are current as of the date shown and are subject to change. 

This report was prepared by Confluence Investment Management LLC and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change. This is not a solicitation or an offer to buy or sell any security.