Expenses on capital goods used in productive activities in the domestic economy are incurred by the business sector in most instances. It is important, however, to factor the deduction of capital depreciation in estimating this expenditure.
Specifically, net private domestic investment is obtained from the subtraction of the capital consumption adjustment from gross private domestic investment. The primary function of this index is to measure the net increase in the capital stock resulting from the investment.
The net private domestic investment shows the total amount of investment in the capital used to expand the capital stock provided by the business sector. Generally, capital depreciation is usually between 50 to 85 percent of the gross investment.
In most instances, net private domestic investment is generally positive, which indicates that gross investment exceeds depreciation. Although, it is possible to have a negative net investment. This only implies that depreciation exceeds the gross investment.
The chart above shows the trend of net domestic investment in the U.S. over the past few decades.
Corporate Investment in the U.S.
Corporate investment in the U.S. currently shows a sharp contraction than what was estimated in 2019. The tepid growth of corporate profit growth cast a shadow on the economy already being associated with fears of a recession. The shaded areas in the chart indicate other times of recession in the U.S and assessing the events around the current trends in Corporate investment in the U.S., here are a few important points to note:
- The seeming downturn in business spending has been largely tied to the U.S trade war with China that lasted for almost 15 months. There are speculations that the soft investment and slow profit gains reported by the Commerce Department might have raised doubts on the ability of consumers to keep driving the economy.
- Also, according to Jerome Powell, Chairman of the U.S. Federal Reserve, trade policy tensions which had also gone through some highs and lows had caused an appreciable level of uncertainty in investment and exports in the U.S. This posed a major risk to the country’s longest economic expansion record which has currently lasted for over 10 years.
- Powell also stated that contacts from the U.S. central bank had hinted policymakers of uncertainties in trade policy causing a downturn in investing in their businesses. These uncertainties also led to cautious spending in construction which according to a business economics professor at Loyola Marymount University, Sung Won Sohn, was a bad sign.
Overall, business investment dropped at a 1.0% annualized rate last quarter. This is the steepest decline observed since the fourth quarter of 2015 (See above chart). The total drop in business investment was estimated to have been pulled down by an 11.1% decline rate in spending on structures. This only reflects a decrease in the categories of commercial and healthcare, and mining exploration, shafts, and wells.
Also, government investment in the second quarter of 2019 was noted to have increased as state and local governments began to spend more than previously predicted. This is noted to be one of the most significant spendings on homebuilding since the Great Recession. For now though the stock market does not care about this type of news.