Gap Analysis #2: A Lost Decade for Private Investment

By SBE Council at 10 June, 2016, 9:03 am

-The second in a series of seven special reports highlighting key gaps in the U.S. economy-

Raymond J. Keating

Chief Economist

Summary: Compared to the average growth rates prevailing over the past six decades, the U.S. has experienced a historic private investment gap or shortfall during this current recovery/expansion period. This amounts to a lost decade when it comes to private-sector investment. Consider the comparisons in each major investment category:

-Real gross private domestic investment grew at an average annual rate of 1.8 percent from 2007 to 2016, compared to the 4.9 percent average growth rate from 1956 to 2016. This difference leaves a real gross private domestic investment gap of at least $1.4 trillion (in 2009 dollars) in 2016.

-Real fixed investment grew at an average annual rate of 1.0 percent from 2007 to 2016, compared to the 3.9 percent average growth rate from 1956 to 2016. This difference leaves a real fixed investment gap of at least $1.1 trillion (in 2009 dollars) in 2016.

-Real fixed nonresidential investment (or business investment) grew at an average annual rate of 2.1 percent from 2007 to 2016, compared to the 4.6 percent average growth rate from 1956 to 2016. This difference leaves a real fixed nonresidential investment gap of at least $573 billion (in 2009 dollars) in 2016.

-Real fixed nonresidential structures investment grew at an average annual rate of 0.9 percent from 2007 to 2016, compared to the 2.1 percent average growth rate from 1956 to 2016. This difference leaves a real fixed nonresidential structures investment gap of at least $94 billion (in 2009 dollars) in 2016.

-Real fixed nonresidential equipment and software investment grew at an average annual rate of 3.0 percent from 2007 to 2016, compared to the 5.6 percent average growth rate from 1956 to 2016. This difference leaves a real fixed nonresidential equipment and software investment gap of at least $385 billion (in 2009 dollars) in 2016.

-Real fixed nonresidential intellectual property products investment grew at an average annual rate of 3.1 percent from 2007 to 2016, compared to the 6.5 percent average growth rate from 1956 to 2016. This difference leaves a real fixed nonresidential intellectual property products investment gap of at least $236 billion (in 2009 dollars) in 2016.

-Real fixed residential investment grew at an average annual rate of -1.3 percent from 2007 to 2016, compared to the 3.4 percent average growth rate from 1956 to 2016. This difference leaves a real fixed residential investment gap of at least $579 billion (in 2009 dollars) in 2016.

Poor U.S. economic growth over the past decade largely has been a story about badly under-performing private investment. Investment, of course, not only affects current measures of economic growth, but also is foundational to future productivity, economic, income and employment growth.

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After experiencing one of the worst recessions since the Great Depression from late 2007 to mid-2009, the subsequent period of recovery/expansion has grossly under-performed. In effect, the U.S. has experienced, and continues to experience, nearly a decade of poor economic performance. As the nation looks to a new presidential administration and a new Congress taking power in January 2017, SBE Council is publishing a series of analyses that highlight key gaps or shortfalls in our economy. The first analysis focused on the GDP shortfall has been published, followed by analyses on investment (this report), entrepreneurship, productivity, income, jobs, and trade, with a final report highlighting the basic policy changes needed to close these gaps.

This second SBE Council “Gap Analysis” looks at the stunning shortfall in real private investment over the past decade. Indeed, the U.S. economy has experienced a “lost decade” when it comes to investment, and that in turn, has been central to the poor economic growth experienced, as explained in the first Gap analysis.

Consider the shortfall or gap in each major private investment component as presented in GDP data.

$1.4 Trillion Real Gross Private Domestic Investment Gap in 2016

The U.S. Bureau of Economic Analysis defines “gross private domestic investment” as: “Private fixed investment and change in private inventories. It is measured without a deduction for consumption of fixed capital (CFC) [that is, depreciation], includes replacements and additions to the capital stock, and excludes investment by U.S. residents in other countries.” This is the broadest measure of private investment.

The investment gap that has developed over the last decade in real gross private domestic investment is substantial. This gap is determined by comparing actual gross private domestic investment levels since 2006, with the levels that would have been achieved if investment increased at the average annual rate over the 60-year period from 1956 to 2016.

Real gross private domestic investment grew at an average annual rate of 1.8 percent from 2007 to 2016. That was a fraction of the 4.9 percent average growth rate from 1956 to 2016. This difference (assuming a rather generous growth rate for 2016) leaves a real gross private domestic investment gap of $1.4 trillion (in 2009 dollars) in 2016.

Also, in 2015, the level of real gross private domestic investment stood at $2.85 trillion, compared to $2.73 trillion in 2006 (both, again, in 2009 dollars). Over the nine-year period, that was growth of a mere 4.4 percent.

$1.1 Trillion Real Fixed Investment Gap in 2016

The U.S. Bureau of Economic Analysis defines “fixed investment” as: “Consists of purchases of residential and nonresidential structures and of equipment and software by private businesses, [and] by nonprofit institutions … in the United States.” Fixed investment falls under gross private domestic investment, excluding changes in private inventories. Fixed investment by governments also is excluded in this measure.

Again, the investment gap that has developed over the last decade in real fixed investment is substantial. This gap is determined by comparing actual fixed investment levels since 2006, with the levels that would have been achieved if investment increased at the average annual rate over the 60-year period from 1956 to 2016.

Real fixed investment grew at an average annual rate of 1.0 percent from 2007 to 2016. That was a fraction of the 3.9 percent average growth rate from 1956 to 2016. This difference (assuming a rather generous growth rate for 2016) leaves a real fixed investment gap of $1.1 trillion (in 2009 dollars) in 2016.

Also, in 2015, the level of real fixed investment stood at $2.74 trillion, compared to $2.66 trillion in 2006 (both, again, in 2009 dollars). Over the nine-year period, that was growth of a mere 3.0 percent.

$573 Billion Real Fixed Nonresidential Investment Gap in 2016

The U.S. Bureau of Economic Analysis defines “nonresidential fixed investment” as: “Consists of purchases of both nonresidential structures and equipment and software.” This in effect is fixed business investment.

Once more, the investment gap that has developed over the last decade in real fixed nonresidential investment is substantial. This gap is determined by comparing actual fixed nonresidential investment levels since 2006, with the levels that would have been achieved if investment increased at the average annual rate over the 60-year period from 1956 to 2016.

Real fixed nonresidential investment grew at an average annual rate of 2.1 percent from 2007 to 2016. That was less than half of the 4.6 percent average growth rate from 1956 to 2016. This difference (assuming a rather generous growth rate for 2016) leaves a real fixed nonresidential investment gap of $573 billion (in 2009 dollars) in 2016.

Also, in 2015, the level of real fixed nonresidential investment stood at $2.21 trillion, compared to $1.84 trillion in 2006 (both, again, in 2009 dollars). Over the nine-year period, that was growth of only 20.1 percent. As sluggish as that was, comparing the 2015 level to the pre-recession high in 2007, fixed nonresidential investment grew by only 13.3 percent.

$94 Billion Real Fixed Nonresidential Structures Investment Gap in 2016

The U.S. Bureau of Economic Analysis defines “structures” as: “Products that are usually constructed at the location where they will be used and that typically have long economic lives.” Fixed nonresidential structures investment is in effect business investment in structures.

Once again, the investment gap that has developed over the last decade in real fixed nonresidential structures investment is substantial. This gap is determined by comparing actual fixed nonresidential structures investment levels since 2006, with the levels that would have been achieved if investment increased at the average annual rate over the 60-year period from 1956 to 2016.

Real fixed nonresidential structures investment grew at an average annual rate of 0.9 percent from 2007 to 2016. That was less than half of the 2.1 percent average growth rate from 1956 to 2016. This difference (assuming a rather generous growth rate for 2016) leaves a real fixed nonresidential structures investment gap of $94 billion (in 2009 dollars) in 2016.

Also, in 2015, the level of real fixed nonresidential structures investment stood at $457.7 billion, compared to $451.5 billion in 2006 (both, again, in 2009 dollars). Over the nine-year period, that was growth of a mere 1.4 percent.

$385 Billion Real Nonresidential Equipment and Software Investment Gap in 2016

The U.S. Bureau of Economic Analysis defines “equipment and software” investment as: “Investment in equipment and software consists of capital account purchases of new machinery, equipment, furniture, vehicles, and computer software; dealers’ margins on sales of used equipment; and net purchases of used equipment from government agencies, persons, and the rest of the world. Own-account production of computer software is also included.”

Once again, the investment gap that has developed over the last decade in real fixed nonresidential equipment and software investment is substantial. This gap is determined by comparing actual fixed nonresidential equipment and software investment levels since 2006, with the levels that would have been achieved if investment increased at the average annual rate over the 60-year period from 1956 to 2016.

Real fixed nonresidential equipment and software investment grew at an average annual rate of 3.0 percent from 2007 to 2016. That was far short of the 5.6 percent average growth rate from 1956 to 2016. This difference (assuming a rather generous growth rate for 2016) leaves a real fixed nonresidential equipment and software investment gap of $385 billion (in 2009 dollars) in 2016.

Also, in 2015, the level of real fixed nonresidential equipment and software investment stood at $1.06 trillion, compared to $870.8 billion in 2006 (both, again, in 2009 dollars). Over the nine-year period, that was growth of only 21.5 percent.

$236 Billion Real Intellectual Property Products Investment Gap in 2016

The U.S. Bureau of Economic Analysis defines “intellectual property products investment” as “expenditures for R&D and for entertainment, literary, and artistic originals.”

Once again, the investment gap that has developed over the last decade in real fixed nonresidential intellectual property products investment is substantial. This gap is determined by comparing actual fixed nonresidential intellectual property products investment levels since 2006, with the levels that would have been achieved if investment increased at the average annual rate over the 60-year period from 1956 to 2016.

Real fixed nonresidential intellectual property products investment grew at an average annual rate of 3.1 percent from 2007 to 2016. That was less than half of the 6.5 percent average growth rate from 1956 to 2016. This difference (assuming a rather generous growth rate for 2016) leaves a real fixed nonresidential intellectual property products investment gap of $236 billion (in 2009 dollars) in 2016.

Also, in 2015, the level of real fixed nonresidential intellectual property products stood at $696.8 billion, compared to $517.5 billion in 2006 (both, again, in 2009 dollars). Over the nine-year period, that was growth of 34.6 percent. That was, by far, the best performance of any category of investment over this period, although it still came up short of where it would be under a normal growth scenario.

$579 Billion Real Fixed Residential Investment Gap in 2016

The U.S. Bureau of Economic Analysis defines “residential fixed investment” as: “Consists of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants.”

Once again, the investment gap that has developed over the last decade in real fixed residential investment is substantial. This gap is determined by comparing actual fixed residential investment levels since 2006, with the levels that would have been achieved if investment increased at the average annual rate over the 60-year period from 1956 to 2016.

Real fixed residential investment grew at an average annual rate of -1.3 percent from 2007 to 2016. That compared the 3.4 percent average growth rate from 1956 to 2016. This difference (assuming a rather generous growth rate for 2016) leaves a real fixed residential investment gap of $579 billion (in 2009 dollars) in 2016.

Also, in 2015, the level of real fixed residential investment stood at $529.6 billion, compared to $806.6 billion in 2006 (both, again, in 2009 dollars). Over the nine-year period, that was a decline of 34.3 percent.

Poor U.S. economic growth over the past decade largely has been a story about badly under-performing private investment. Investment, of course, not only affects current measures of economic growth, but also is foundational to future productivity, economic, income and employment growth. Impediments and disincentives for investment, such as increased taxes, more regulation, and reduced international opportunities, have taken a broad and severe toll on the economic well-being of Americans.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.