MW: Business investment plays starring role in second-quarter GDP
The jump in business investment in the second quarter is not an illusion, and it’s likely to continue to grow in coming quarters, economists said Thursday.
Business investment was the star of the second-quarter GDP data, having been revised dramatically upward to a 3.2% advance from an initial estimate of a 0.6% decline. All subcategories of business investment — structures, equipment and intellectual property — were revised higher.
Read more: GDP report shows much stronger economy
This revision “points to a lesser drag from reduced oil & gas activity and a weak global economy than was initially estimated — a signal that domestic momentum is likely stronger than expected,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics.
Nigel Gault, co-chief economist at the Parthenon Group in Boston, said business investment has unfairly been the whipping boy of the recovery. He noted that the share of total fixed business investment as a share of GDP fell to a trough level of 10.9% in the second quarter of 2010 from the prior peak of 13.5% in the second quarter of 2008 but has since recovered to 12.8% this year.
“Overall it’s not as bad as it is often painted — the so-called sluggishness is relative to a slow economy that hasn’t been doing that well,” Gault said.
He said the next couple of years will likely see business investment growing faster than GDP.
Josh Shapiro, chief economist at MFR Inc., said he did not expect business investment to rocket higher. “I don’t think we’re off to the races,” he said.
Shapiro noted that business spending does not lead economic growth.
“Businesses spend when they absolutely have to,” he said. “And they are seeing as the economy continues to grow there is a need to spend some money. It is not anything stupendous.”