This week, the government’s initial estimates of second-quarter GDP will be released. But first, a quiz: What are the four main components of gross domestic product? Consumption, government spending, net exports, and business investment. You know the numbers, right?
The last part, business investment, typically accounts for around 13% of total GDP and includes everything businesses buy to expand their production capacity — think new machinery for a factory floor or better software for managing customer payments.
The second-quarter data follows a strong first quarter in which business investment grew about three times faster than overall GDP over the same period, despite recent headwinds facing companies, including high interest rates that make lending to businesses more expensive.
One of the businesses currently making big investments is 21 Bar & Grill in Keene, N.H. On most days, the restaurant has beer flowing from the taps and chefs mixing their own buffalo sauce. But not on this day.
“Today we finally broke through the barrier,” co-owner Beth Wood said.
21 bought the store next door this spring and is expanding into that space, she said. The move will double the seating capacity. Plus, “our kitchen was really small, so we’re going to quadruple the size of the kitchen,” she said.
It’s an expensive move, but Wood thinks it will pay off in the future.
“Now we can host a lot more private events and we can do catering off-site,” she said.
When lots of companies make such investments, it’s “usually a sign of optimism,” said Kevin Cummins, chief U.S. economist at NatWest Markets.
Business investment has outpaced overall GDP in three of the past four quarters, but much of that growth has been confined to certain sectors.
Cummins said last year that federal legislation has led to a “significant increase in manufacturing facilities and a significantly increased level of investment in structures.”
Steve Blitz, chief US economist at consultancy TS Lombard, said investment in intellectual property had picked up steam in the first quarter of the year.
“Most intellectual property is software, so [artificial intelligence],” He said.
But Holly Wade, executive director of the National Federation of Independent Business Research Centres, said they were now seeing some small businesses refrain from making new investments.
“We’re waiting to see if interest rates start to come down a little bit. We’ll have to wait another six months, a year until loans become cheaper,” she said.
If the Federal Reserve starts lowering interest rates, more investment could go into growing these businesses and less into paying interest.
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