Overall knowledge-related business investment continued to grow in 3Q 2021

But the semiconductor shortage may be creating problems for investment in information processing equipment

As BEA’s data released yesterday showed, GDP growth in the 3rd quarter of 2021 came in at a disappointing 2% annual rate. This was well below the 6.5% growth rate of the previous quarter and below general expectations. However, business (non-residential fixed) investment in knowledge-related areas grew by 5.7%. This grow was due to healthy increases in investment software (up by almost 15%) and R&D spending (up by over 9%). Investment in information processing equipment unfortunately declined by 6%. Total business investment in all other areas declined by 3.5%.

The decline in investment in information processing equipment is especially worrisome. This marks the second quarter in a row of declines following four earlier quarters of growth. This may be a reflection of the ongoing semiconductor shortage.

Another casualty of the computer chip shortage is the auto industry. Both expenditure on motor vehicles and parts and investment in transportation equipment dropped dramatically in the 3rd quarter. That decline accounts for much of the overall slow growth in GDP. If motor vehicle expenditures had simply stayed at the 2Q level, the overall GDP growth rate would have been double, at a respectable 4%.  

Knowledge related business investments did not suffer as great a cutback as other business investments in the COVID-19 slowdown and have been growing since 2Q20. They now account for 58% of total business investment (up from 50% in 3Q19). Looking at only the two digital-related investments of information processing equipment and software, this subcategory makes up 40% of business investments.

[Note: 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.]

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