The Latest GDP Data: Troubling Numbers on Business Investment

By SBE Council at 27 January, 2022, 11:25 am

by Raymond J. Keating -

The latest GDP - gross domestic product - report from the U.S. Bureau of Economic Analysis requires some digging to get at what is, or might be, going on with the economy. What is most striking are the questions and concerns raised regarding business investment.

For the fourth quarter of 2021, real annualized GDP growth came in at 6.9 percent (all data unless otherwise noted are annualized). That's a welcome step up from the third quarter's 2.3 percent. However, there are serious caveats (as we shall see).

Activity on Trade, Personal Consumption a Plus

The major positive news came on the trade front where real exports jumped by 24.5 percent and imports by 17.7 percent. Trade has been devastated before and during this pandemic, so life on this front is a plus. Keep in mind, that real U.S. exports, even after this nice jump in the fourth quarter, remain below their pre-pandemic levels.

Also, real personal consumption expenditures grew by 3.3 percent in the fourth quarter, up from 2.0 percent in the third quarter.

A Red Flag: Weak Private Investment

The major concerns in this report have to do with the underwhelming numbers on private investment, specifically, nonresidential (i.e., business) and residential (i.e., housing) investment.

First, real fixed nonresidential investment grew by only 2.0 percent in the fourth quarter, and that came after a sluggish 1.7 percent in the third quarter.

Second, among the major categories within nonresidential investment, only investment in intellectual property products grew strongly, by 10.6 percent in the fourth quarter after 9.1 percent in the third quarter.

Meanwhile, structures investment dropped by 11.4 percent in the fourth quarter, after a decline of 4.1 percent in the third quarter, and equipment investment managed to grow by only 0.8 percent in the fourth quarter, following on a decrease of 2.3 percent in the third quarter.

Third, residential investment declined for the third straight quarter, by -0.8 percent in the fourth, by -7.7 percent in the third, and by -11.7 percent in the second.

Fourth, the big gainer under private investment came with private inventories. That would be expected given the work being done to free up supply chains and restock stores.

At the same time, inventory data is transitory, and doesn't represent the type of investment that generates growth now and in the future. It is worth noting that the change in private inventories in the fourth quarter accounted for 4.9 percentage points of the 6.9 percent growth rate. For good measure, the change in private inventories accounted for 2.2 percentage points of the 2.3 percent growth rate in the third quarter. These large inventory contributions wind up diminishing the depth or quality of growth over these past two quarters.

The Obvious Question: What's hampering private investment?

Uncertainty swirling around the pandemic remains a real hindrance. But what cannot be ignored are the costs being imposed and threats being raised by the Biden administration and Congress in broad policy tax and regulatory areas, along with the persistence of protectionist trade policies and an emphasis on increased government spending.

All of these anti-growth actions discourage private investment, and therefore, will serve to diminish entrepreneurship, innovation, and productivity, economic and income growth.

After much of the economy was shut down due to the pandemic, a snapback was inevitable. The real question always has been the following: Is policymaking going to help or hinder economic recovery and expansion post-pandemic?

Right now, the Biden administration and Congress are bent on undermining economic growth. That desperately needs to stop, and be reversed. This economy needs pro-growth tax and regulatory relief, free trade, and reined in government spending.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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