IPP Investment Carries Overall US Business Investment by Eric Bush, Gavekal Capital
Total business investment as a percentage of GDP has declined for three straight quarters. As the chart below shows this is somewhat worrying since declining business investment as a percentage of GDP is associated with economic recessions. However, before recession alarms begin to sound it needs to be stated that just because business investment has fallen it doesn’t necessarily signal a recession is imminent. It just happens to be that in all recessions since 1946 business investment has declined as a percent of GDP.
Investment in intellectual property products (IPP) saved the second quarter investment stats from being terrible. Overall gross domestic fixed investment, on a SAAR, declined by $9.9 billion in the second quarter. However, IPP increased by $7.2 billion which partially offset the large decline in equipment (-$11.7 billion) and the smaller decline in structures (-$5.3 billion).
Investment in IPP is now 4.1% of GDP while investment in equipment has fallen to 5.9% of GDP and investment in structures is 2.8%.
It is safe to assume that IPP will continue to make up a larger proportion of business investment in the US going forward. IPP investment has grown by 6.18% year-over-year compared to investment in equipment which has grown 2.8%. More importantly, investment in equipment is growing well below its 20-year average growth rate of 4.19% while investment in IP is basically growing at its 20-year average growth rate of 6.27%.