[It is possible] that in light of Sarbanes-Oxley and the increased scrutiny that firms face as a result of ongoing corporate and accounting scandals, companies have become more risk averse and less willing to commit themselves to new expenditures of capital or labor without a good deal of confidence that they will still “make their numbers.” Certainly, I hear anecdotes about the time, attention and resources senior management must now apply to these issues, especially as the rules regarding how financial controls are monitored and managed are put into place.

After the economic expansion stumbled in the spring of last year, it now looks to be on a firmer footing. A broad range of economic data suggests that real GDP is growing noticeably above trend...We’ve seen vigorous growth in business spending and solid growth in consumer spending.

We will probably see business demand for credit rise further with the trimming of profit growth among nonfinancial firms...In terms of the ability to borrow, business balance sheets overall look to be in good shape in terms of debt burdens.

As U.S. business investment has recently begun a cyclical recovery while residential investment has remained strong, the domestic saving shortfall has continued to widen, implying a rise in the current account deficit and increasing dependence of the United States on capital inflows.

Higher home prices in turn have encouraged households to increase their consumption. Of course, increased rates of homeownership and household consumption are both good things. However, in the long run, productivity gains are more likely to be driven by nonresidential investment, such as business purchases of new machines.

But businesses owned by women and minorities remain relatively small, undercapitalized, and underrepresented in the more capital-intensive sectors of the economy. Greater access to capital and credit are widely reported to be the number one obstacle to faster growth for these firms, with greater access to opportunities in the corporate supply chain a close second.

Currently projected budget deficits are unsustainable and will ensure a low level of national saving. Conventional economic analysis suggest that this situation is likely to raise long-term interest rates, crowd-out business capital investment, depress productivity growth, and exacerbate the current account deficit.

This apparent disparity in sentiment between business people and market participants could reflect the heightened additional concerns of business executives about potential legal liabilities rather than a fundamentally different assessment of macroeconomic risks.

In dollar terms, capital spending is on a solidly upward trend and, adjusted for price changes, spending has been even stronger given the continuing decline on a secular basis in equipment prices.

The good news is that [business investment] has finally rebounded...But there are hints of a possibility that business investment in high-tech could slow down...[For example] the recent slide in the stock prices of some major high-tech firms...During the last year, quality-adjusted computer prices haven’t been falling as fast, and that may signal some slowing of technological innovation in this sector. Finally, there is some industry opinion that the pace of software development is beginning to slow.

The strong balance sheets and cash positions of many firms suggest the possibility of more rapid capital spending. But will businesses continue to defer such spending as they had earlier in the cycle?...Some firms still have a fair amount of unused capacity embodied in the computers and other equipment they bought during the tech and Y2K spending booms of the late '90s.

Business investment spending might well show a temporary slowdown in the first quarter after the expiration of the tax incentives, but should resume expanding at a robust pace shortly thereafter, reflecting assessments that substantial opportunities remain to enhance efficiency by installing new capital goods, particularly IT and communications equipment.

Following the pattern of recent quarters, corporate investment in fixed capital and inventories apparently continues to fall short of cash flow. The protracted nature of this shortfall is unprecedented over the past three decades. Moreover, the proportion of temporary hires relative to total employment continues to rise, underscoring that business caution remains a feature of the economic landscape.

This hesitancy on the part of businesses to expand risk-taking, as I have noted in the past, is an apparent consequence of scandals surrounding corporate accounting and governance, an aftermath of the stock market surge. Although there is no compelling evidence that corporate governance risk has fully subsided, with time, it should. An increased willingness to borrow, and ample liquid assets, should provide a further lift to capital investment and, with it, economic activity.

All the new financial products that have been created in recent years contribute economic value by unbundling risks and reallocating them in a highly calibrated manner. The rising share of finance in the business output of the United States and other countries is a measure of the economic value added by the ability of these new instruments and techniques to enhance the process of wealth creation.

...This redistribution of risk induces more investment in real assets, presumably engendering a higher standard of living. This occurs because financial intermediation facilitates diversification of risk and its redistribution among people with different attitudes toward risk. Any mechanism that shifts risk from those who choose to withdraw from it to those more willing to take it on increases investment without significantly raising the perceived degree of discomfort from risk borne by the public.