GDP data show growth in knowledge-related investment

Obviously the big story with today’s GDP numbers is the rebound in consumer spending. But the more important story for long run economic growth is what is happening in business investment. And there the picture looks bright.

Overall, private fixed non-residential investment grew at a health rate in the first quarter of 2021 (1Q21). The one exception was investment in non-residential structures (i.e., factories and commercial buildings) which declined ever so slightly.

More importantly, business (non-residential fixed) investment in knowledge-related areas is leading the way in the recovery. I define knowledge-related investment as the combination of investment in Information Processing Equipment, R&D, and Software. The first of these three categories is reported in the GDP data as a subcategory of Non-residential Fixed Investment: Equipment. The latter two are reported as subcategories of Non-residential Fixed Investment: Intellectual Property Products.

Knowledge related business investments did not suffer as great a cutback as other business investments in the COVID-19 slowdown and have been growing steadily since 2Q20 (see charts below). The now account for 57% of total business investment (up from 50% in 3Q19). Looking at only the two digital-related investments of ICT equipment and software, this subcategory makes up 40% of business investments.

[Note that the third subcategory of Intellectual Property Products category is Entertainment, Literary & Artistic Originals. Investment in this category was just barely up. Interestingly, this sluggishness comes despite the rise of non-fungible tokens (NFT) as an investment. I’m not sure how NFTs are incorporated into the GDP.]

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