GDP bright spot: Knowledge-related business investment in software and R&D

While overall GDP declined slightly in 2Q 2022, knowledge-related business investment in software and R&D continued strong growth. But investment in information processing equipment was lower.

There is (and will be) considerable discussion of this morning’s numbers for US GDP for the 2nd quarter of 2022. BEA’s “Advanced Estimate” shows GDP dropped by 0.2% compared to the first quarter (a decline of 0.9% at an annual rate) – triggering a debate about whether the US is in recession (a two quarter drop in GDP is used by many as the definition of a recession whereas economist use a broader set of indicators).

Contributing to this weakness was the fact that business (non-residential fixed) investment was essentially flat. And investment in information processing equipment (a key knowledge-related sector) declined at an annual rate of 6.4%.

One bright spot: the other knowledge-related areas continued strong growth. Investment in software was up by an annual rate of 8.9% and R&D spending up by 7.5%.

Obviously those two sectors make up only a small fraction of our $25 trillion economy. But the willingness of businesses to continue to increase their investments in software and R&D bodes well for future economic growth.

[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.]