Since the introduction of the National Income and Product Accounts (NIPA) in 1946, the US has experienced 11 recessions. In every recession nonresidential private fixed investment slowed significantly on a year-over-year basis and in eight out of 11 recessions, private fixed investment actually declined on a year-over-year basis. And only once, in 1986-1987, did the year-over-year growth rate in gross private fixed investment fall into negative territory without a recession hitting the economy (note: In 1952, the growth rate went negative and the economy entered a recession 11 months later).  As of 3Q2016, the year-over-year change in private fixed investment is at -1.06%.

1-copy-copy-copy-copy-copy

We know that the most dangerous (expensive?) words in finance and economics are ‘but this time is different’. With that in mind, here is a reason why this time might be different (or why it might be like 1986-1987).

Nonresidential gross private fixed investment is made up of two categories: tangible and intangible investment. Tangible investment includes investments in equipment and structures. Intangible investment is made up of intangible property products. The decline in the overall aggregate category falls squarely on the shoulders of the tangible portion of fixed investment. The year-over-year rate of change of investment in equipment and structures is at -3.80%. At the same time, investment in intangible fixed investment continues to grow at a healthy 5.05% year-over-year clip. Why this time might be different is that intangible investments continue to account for a greater share of overall business investment and currently represents one-third of total fixed investment. The current level is just a few percentage points off of the all-time high share of total business investment that occurred in 2009 (when companies slashed fixed investment in the recession by a much larger degree than they cut intangible investment). Since 1992, intangible investments on a nominal dollar basis has accounted for a greater amount of fixed investment than investments in structures. That is too say that over the last several decades it has become quite clear that businesses are using more of their capex budget on intangible investment relative to tangible investment (yet company-level accounting doesn’t recognize this type of investment). If intangible investment continues to hold up well than the US may be able to slide by a recession even if tangible fixed investment is signalling otherwise.

1-copy-copy-copy-copy-2

1-copy-copy-copy-copy

1-copy-copy-copy

Sign up for reports from Gavekal Capital