The Shifting Nature Of US Business Investment by Eric Bush, CFA, Gavekal Capital Blog
A common complaint is that private companies just aren’t investing in the future the way they once did. If one looks at gross private fixed investment as a % of GDP, it is true that overall private investment is below peak investment rates seen in 1979, 2000, and 2006. However, the current rate, 16.25% of GDP, is just slightly below the average level on investment since 1947 (16.63%).
So while the overall level of investment is currently at an average level, the mix of that business investment has undergone quite a bit of change over the last couple of decades and perhaps this is why it “feels” like there is less investment going on in the US economy. The modern corporation tends to invest more in intangible investments like R&D, employee education, and brand equity than in physical, tangible investments. Tangible investments such as property, plant and equipment that are purchased from an outside party have become more commoditized and in order to create a sustainable competitive advantages companies must create unique internal capital to drive future profitability. We can see the shift that has occurred on aggregate level by looking at business investment from the GDP report. In the 2013 NIPA comprehensive revision, the Bureau of Economic Analysis adjusted the national accounts in the United States to include investment in intellectual property products like research and development and artistic originals that produce a long-term income stream like Seinfeld, for example. The US was the third country to include intangible investments in the national accounts following the lead of Canada and Australia in 2009. The EU and Japan are now following in the footsteps of these countries and will be including intangible investments in their national accounts in the near future.
Overall, 4.1% of total private investment in the US are now in intangible investments. Businesses currently spend a greater percentage of GDP on intangibles investments than the US spends on residential fixed investment. The US also invests 35% more in intellectual property products (IPP) per year than it does on private structures. In fact, since 1992 the US has spent more on IPP in each year than it has spent on structures. US businesses spent nearly $700 billion in 2014 on intellectual property products and spent over $2.2 trillion overall on business investment. To say then that US companies aren’t investing enough in the future seems like a false statement that isn’t supported by the national accounts data.