The New Normal? Slower R&D Spending

In case you need more to worry about, try this: the pace of research and development (R&D) spending has slowed. The National Science Foundation defines R&D as “creative work undertaken on a systematic basis in order to increase the stock of knowledge” and application of this knowledge toward new applications. (The Bureau of Economic Analysis (BEA) used to treat R&D as an intermediate input in current production. But the latest benchmark revision of the national accounts recorded R&D spending as business investment expenditure. See here for an interesting implication of this change.)

The following chart shows the BEA data on total real private R&D investment spending (purchased or performed on own-account) over the last 50 years, on a year-over-year percent change basis. (For a snapshot of R&D spending across states in 2007, see here.)

Notice the unusually slow pace of R&D spending in recent years. The 50-year average is 4.6 percent. The average over the last 5 years is 1.1 percent. This slower pace of spending has potentially important implications for overall productivity growth, which has also been below historic norms in recent years.

R&D spending is often cited as an important source of productivity growth within a firm, especially in terms of product innovation. But R&D is also an inherently risky endeavor, since the outcome is quite uncertain. So to the extent that economic and policy uncertainty has helped make businesses more cautious in recent years, a slow pace of R&D spending is not surprising. On top of that, the federal funding of R&D activity remains under significant budget pressure. See, for example, here.

So you can add R&D spending to the list of things that seem to be moving more slowly than normal. Or should we think of it as normal?

About John Robertson 20 Articles

Affiliation: Federal Reserve Bank of Atlanta

John C. Robertson is a vice president at the Federal Reserve Bank of Atlanta. He is the team leader for the macropolicy and applied microeconomic research group at the Atlanta Fed and is one of the Bank's senior monetary policy advisers.

Dr. Robertson joined the Atlanta Fed's research department in December 1997 from the Australian National University in Canberra, Australia. His research has been published in many distinguished economics journals. He became an assistant vice president in 2000 and assumed his current position in December 2005.

A native of Dunedin, New Zealand, Dr. Robertson holds bachelor's and master's degrees from the University of Canterbury in New Zealand and earned his Ph.D. in economics from Virginia Tech in 1992 and is married with two children.

Visit: John Robertson's Page

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