GDP Business Investment Numbers Reveals Concerns

By SBE Council at 7 May, 2024, 4:23 pm

by Raymond J. Keating -

Business investment is essential to economic growth now, but also into the future, as investment serves as the seeds for future growth and development.

In the GDP data, business investment is captured in real private fixed nonresidential investment. And there are three broad areas of investment within this larger category, that is, structures, equipment, and intellectual property products.

Equipment includes information processing equipment, industrial equipment, transportation equipment, and a catchall "other" equipment. As for intellectual property products, this includes software, research and development, and entertainment, literary and artistic originals.

How do the recent investment numbers for the U.S. economy hold up?

● Real fixed nonresidential investment (seasonally adjusted annual rate) grew at 2.9 percent in the first quarter of 2024 (latest data), and for all of 2023, it grew by 4.5 percent. In addition, since we've been clear of the pandemic, from the first quarter of 2022 to the first quarter of 2024, growth has averaged 4.8 percent.

These numbers, however, fall notably short of the historic average of 5.1 percent since 1950. For good measure, the average from 1950 to 2006 registered 5.5 percent, versus a 2007-to-2024 average of 3.7 percent.

● Real fixed nonresidential structures investment actually declined by 0.1 percent in the first quarter of 2024, but for all of 2023, it grew by 13.2 percent. Post-pandemic, from the first quarter of 2022 to the first quarter of 2024, growth has averaged 8.0 percent.

These numbers compare very well to the historic average of 2.8 percent since 1950. However, the average from 1950 to 2006 registered 3.0 percent, versus a 2007-to-2024 average of only 2.0 percent.

● Real fixed nonresidential equipment investment expanded by 2.1 percent in the first quarter of 2024, but for all of 2023, it shrank by 0.3 percent. Since we've been clear of the pandemic, from the first quarter of 2022 to the first quarter of 2024, growth has averaged 2.5 percent.

These numbers come up well short of the historic average of 5.8 percent since 1950. In addition, the average from 1950 to 2006 registered 6.5 percent, versus a 2007-to-2024 average of 3.5 percent.

● Finally, real fixed nonresidential intellectual property products investment rose by 5.4 percent in the first quarter of 2024, and for all of 2023, it grew by 4.5 percent. Since clear of the pandemic, from the first quarter of 2022 to the first quarter of 2024, growth has averaged 5.7 percent.

These growth numbers, though, fell short of the historic average of 7.3 percent since 1950. In addition, the average from 1950 to 2006 registered 7.7 percent, versus a 2007-to-2024 average of 5.9 percent.

The bottom line on business investment in recent GDP data - whether post-pandemic or since the onset of the Great Recession in 2007 - is that growth has been far slower than what the U.S. has experienced historically (specifically, during the post-World War II era). This investment under-performance has translated into under-performing overall economic growth.

For example, real GDP growth has averaged 2.0 percent since 2007; and 1.9 percent from the first quarter of 2022 to the first quarter of 2024. And it came in at 1.6 percent in the first quarter 2024. Again, these rates of growth come up far short of the historical averages, which registered 3.6 percent from 1950 to 2006, and 3.3 percent from 1950 to 2024.

If the U.S. wants to, once again, experience strong economic growth, then we need strong investment growth. That means that policymakers should be establishing a policy climate that incentivizes entrepreneurship and private sector investment, such as via substantive and permanent tax and regulatory relief, free trade, sound money, and restrained government spending.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II:52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.

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