Private Fixed Investment’s Recovery: Not So Bad After All
A little over a year ago in these pages we documented the sluggish recovery of private fixed investment since the end of the recession. Up to that point, investment was not rebounding relative to GDP as quickly as it typically does during recoveries, and residential investment seemed to be the key factor holding the total down. But over the past 13 months new data has been released and a new component has been added to GDP—intellectual property—and both of these developments have changed our view of investment in the recovery. This article reexamines the path of private fixed investment and its relationship to GDP over the business cycle, taking these new developments into account.
Back in November 2012, private fixed investment appeared to have stalled. In particular, the usual V-shaped response characteristic of the series in previous recoveries had not materialized. Including current data changes the picture. The V-shape appears, although there is still a long way to go to complete the pattern. Overall, private fixed investment now appears to have been recovering faster than GDP since 2010:Q4.
Meanwhile, the new data show that residential investment rose substantially in 2013. Year-over-year growth by quarter exploded, hitting 20 percent for the first time since 2004:Q2. The sustained, positive pattern over 2013 was a welcome sight after five years of mostly negative growth. The rise in residential investment elevated total fixed investment, compensating for weaker growth in nonresidential investment. Back in November 2012, nonresidential investment had been growing by double digits each quarter (year-over-year) from 2011:Q3 to 2012:Q2, and it appeared likely to continue, bolstering investment in the future. Since then, however, it has averaged just 4.9 percent.
In addition to new data, a change in the way nonresidential investment is measured has altered the picture considerably. During 2013, the Bureau of Economic Analysis added intellectual property to nonresidential fixed investment and adjusted the series all the way back to the beginning of the data. This change increased nonresidential investment by between 7 percent and 24 percent. It also resulted in a small rise in measured GDP, but because GDP is much larger than nonresidential investment the percentage increase was much smaller (between 2 percent and 4 percent). As a consequence, fixed investment as a fraction of GDP from 1950 to 2012 rose from 15.3 percent to 16.7 percent.
While the addition of intellectual property as a component of nonresidential fixed investment made a considerable impact on the size of investment relative to GDP, it had little effect on its business cycle properties. The correlation between fixed investment and GDP over the business cycle was reduced only slightly. This is due to the business cycle properties of intellectual property. While it shares the same qualitative pattern as nonresidential investment, it generally has a smaller quantitative relationship. As a result, the addition of intellectual property weakens the correlations of nonresidential fixed investment and total fixed investment with GDP only slightly.