Today's topic is investment.
Investment is one of those words that means many things to many people. A popular meaning of investment relates to buying financial assets like bonds and stocks. Today's regurgitation is not about buying financial assets. Instead, what I delve into is investment as it refers to the buying of productive assets by firms and new houses by households.. If you took a macro course you might remember the equation:
Y = C+I+G+NX
That equation says that the output of a nation is composed of goods (and services) purchased for consumption (C), for investment (I), by the government (G), and purchased by the foreign sector (NX).
That I is the I that I am writing about today. As the table below shows you, investment can be either residential or nonresidential. The later is what we think of as investment spending by firms as it includes their purchases of structures, equipment, and intellectual property. The former includes purchases of houses, apartment buildings, and other residences.
As I was thinking of choosing a topic for today's blog I wondered what was going on with respect to investment in the USA. As we all know we have been through some rough times in the economy of late. The news media is very focused on topics like consumer spending, overall output, and inflation. I wondered about what has been happening to investment. Investment must have bit someone on the hand lately because it gets very little attention.
One reason for focusing on investment is that it is the key to the future. You buy a new plant today or add on to an existing one makes it possible to increase output in the future. The new plant might also be composed of the latest equipment, technology, and productive methods thereby allowing for an increase in national productivity. Higher productivity not only allows for more output per employee but it also can lead to higher wages without higher inflation.
Below is a table I created using data from the US Bureau of Economic Analysis https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey
What does the table say?
In 2021 investment was $3.6 trillion. The table also shows you that 10 years before, in 2011 it was $2.4 trillion. The fourth column calculates the percentage change over those 10 years to be 54%. That's a pretty healthy increase. Consumer spending grew by 25% over those 10 years. Export sales by only 8%. Overall real GDP increased 22%. Investment's faster growth took it from 15% of real GDP to almost $20%.
Equipment was the largest category in investment at $1.3 trillion in 2021. It rose by 47% over the decade. New housing or residential investment grew even faster at 85%.
If you sum investment in structures, equipment, and intellectual property, you get a measure of the kinds of spending that increase business and national productivity. In 2021 those three parts of investment totaled $2.9 trillion, up from $1.9 trillion in 2011. That extra trillion dollars -- or 50% increase -- gave firms more and better capital to work with.
There is a lot more that can be said about the table. But today's topic is investment. Investment in the USA is a good story. We need to figure out how to make the next decade as good or better! Clearly, business optimism helps. If only our government could figure out how not to damage that fragile forward thinking.
All is fine but productivity and return to the investor are not part of the model. For instance, new equipment (modernization) is supposed to be able to support production at a better return than form equipment. Basically, make more for less cost to the manufacturer....or distributor(Amazon). Housing is different because its return unless owned by an investor group begs the question? ....If I sell can I afford to buy another. Office buildings are semi empty and although, the jury is still out, may stay that way unless a another tenant appears willing to pay a higher rate....but that introduces higher operating cost.
ReplyDeleteWow Hoot. I have no idea what you are trying to say. The Commerce Department has always classified plant, equipment, and newly built housing as investment.
DeleteDear LSD. Otay, otay. I’ve bit my lower fish lip and flapped my gillz til I jez can’t hold my short narrow tuna tongue anymore. Jez gotta expel this gut-wrench’n doo-da thatz been stuck in my gullet. Investment. The current administration is hell-bent on weak’n (kan you sey, “destroy’n?”) our economy . . . mak’n it verwy werwy UNattractive to invest . . . rez and non-rez. You sey . . . “ . . . (sic) if only our govomit kud figger out how not to screw up the economy/kuntry . . .” It knowz-z-z-z wut it’s doing . . . it’s hell-bent on put’n the good ole USA in the rear-view mirror. Thatz the plan, Stan.
ReplyDeleteBeen in ‘appy ‘our fer two plus ‘ourz ‘n after writ’n this I’m not ‘appier.
Tuna, I am heading to happy hour now. Too bad more people do not see what you see -- and you are underwater! Seems almost too much to hope for good government. I guess thirty-something years in government service is too much to overcome. There ought to be a law!
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