Some recovery in nonresidential contruction appears in the offing, spurred partly by lower vacancy rates and rising prices for commerical properties.

In the United States...capital expenditures were below the very substantial level of corporate cash flow in 2003, the first shortfall since the severe recession of 1975.  That development was likely a result of the business caution that was apparent in the wake of the stock market decline and the corporate scandals early this decade.

The capital investment climate in the United States appears to be improving following significant headwinds since late 2000, as is that in Japan.  Capital investment in Europe, however, remains tepid.

Going forward, I anticipate that growth in business investment spending will continue to play a major role through the remainder of the year...Moderate growth in government spending appears to be a reasonable estimate. 

I think the uncertainties going forward are the extent to which the growth in investment spending stays about where it was in the first quarter or picks up to where it was last year... And then oil prices are obviously a source of uncertainty. I think we can handle fluctuations around the range we've seen, but a major breakout would be another kettle of fish.

Swings in business investment spending have driven the pattern of this past business cycle…Firms are positioning themselves for greater efficiency and greater productive capacity…However, the last number we received on business investment from the first quarter GDP figures was lower than some expected, though clearly positive. Nonetheless, going forward, I anticipate that robust growth in business investment spending will continue to play a major role in our growth through the remainder of the year.

The business sector and business investment spending have been strengthening as the expectation of further growth has permeated the marketplace. In this environment, the demand for commercial loans has begun to accelerate...My sense is that there is keen competition among banks to make these loans. Under these circumstances in the past, banks tended to underprice risk. It is particularly important to guard against this temptation, particularly because slackening growth in deposit inflows may put upward pressure on funding costs as the expansion progresses.

As economic conditions and business loan demand have improved, we have expected and seen some degree of easing in commercial lending standards.

Some businesses during the early part of this year may have postponed certain investment spending decisions because of high energy costs. But there has been no sense of panic. Rather, more recent data suggest investment spending—and business spending plans—remain firm.

The art of business lending has changed. Business borrowers have clearly benefited from this new financial environment, which delivers a wider and more affordable menu of credit possibilities...These ongoing changes have important implications for the structure and performance of the financial industry, for innovation and risk in the financial system, for the creation of credit and its distribution, and for macroeconomic growth and stability.

With gasoline prices rising to substantially over two dollars a gallon, consumers may find that growth in their discretionary spending must slow in order to accommodate the increased cost of filling their gas tanks. Similarly, rising energy costs could curtail businesses’ capacity to increase their investment spending. The bottom line is that oil prices persistently in the $50 per barrel plus range could slow the pace of domestic demand growth this year, though they should not jeopardize the expansion itself.

Going forward, businesses will also help drive the expansion by making a substantial contribution to spending growth...I anticipate that the robust growth in business investment spending we have been experiencing will continue for the foreseeable future.

Now, the forces are aligned for strong growth in business investment spending. Firms have had time to fully digest their previous acquisitions of capital. Profits have been strong. The economic outlook is positive, and some of the previous risks and uncertainties are dissipating.

Beyond the financial markets' reaction, these revelations also triggered reforms legislated under the Sarbanes-Oxley Act. The act was designed to boost investor confidence in corporate America by improving the quality of corporate disclosure and financial reporting and increasing the role and responsibility of corporate officers and directors...While this may have been appropriate and necessary, it also has diverted companies' attention from new investment projects and slowed plans for future expansion.

The overall environment for investment and innovation could be materially affected by the disposition of our fiscal and external imbalances and our exceptionally low net national savings rate.