Fixed investment, sometimes referred to as capital spending, is an important part of gross domestic product (GDP) and the overall economy. It includes expenditures on things like factories, machinery, computers and other equipment that will be used in future production. An example of business fixed investment is spending on industrial equipment like machines to manufacture goods or technology like computers and software that will increase productivity. This type of investment, called nonresidential fixed investment, makes up a major share of total fixed investment and can indicate the health of the business sector.
Nonresidential fixed investment is a key indicator of business confidence and economic growth
Nonresidential fixed investment includes spending on factories, warehouses, machinery, technology and other equipment that businesses use to expand capacity and boost productivity. It accounts for about 80% of total fixed investment in the U.S. When businesses are optimistic about future growth and demand, they will increase this kind of investment. So rising nonresidential fixed investment signals business confidence and expectations for the economy to grow. On the other hand, businesses will cut back on equipment and construction spending when demand is weak or uncertain. So declining investment in this area can predict an economic slowdown. Analysts watch trends in nonresidential investment closely to gauge the direction of economic activity.
Examples of nonresidential fixed investment are office buildings, factories and industrial machinery
Specific examples of business fixed investment spending include:
– Constructing new office buildings, warehouses or factories
– Purchasing new equipment like industrial machines, forklifts and conveyor belts to expand manufacturing capacity
– Buying new computers, software, servers and IT infrastructure to improve productivity
– Investing in renewable energy infrastructure such as wind turbines and solar panels
– Upgrading to more fuel efficient heavy machinery used in construction, farming or transportation
– Opening additional retail space and outfitting stores with modern point of sale systems and inventory tech
This type of business investment goes beyond just replacing depreciated equipment. By expanding capacity and adopting more advanced technology, companies aim to meet rising demand and capture a larger share of the market.
Declining nonresidential investment can predict recession
Trends in nonresidential fixed investment are often a leading economic indicator. History shows that business confidence and equipment spending usually peaks just before the onset of recession. For example in 2000-2001 during the dot com crash and 2007 heading into the financial crisis. As demand falls off, companies pull back on investment in new structures and productivity enhancing tools. So declining investment tends to precede downturns as businesses grow more cautious. On the other hand businesses ramp up spending early in recoveries as sales, profits and optimism pick back up. So strong gains in this area often indicate the economy is heating up again after a recession. Paying attention to patterns in nonresidential investment can provide key signals on where the overall economy is headed next.
Government spending initiatives can aim to stimulate business fixed investment
During major downturns like the Great Recession, policymakers will sometimes implement targeted stimulus programs to encourage business fixed investment and halt the downward spiral. For example allowing accelerated depreciation tax deductions on new equipment, structures or vehicles. This increases after-tax cash flows to give companies more funds to invest. Lower interest rates also reduce financing costs for long term business investments. Infrastructure initiatives focused on roads, energy or IT can indirectly support greater private sector spending too. When nonresidential fixed investment is a lagging area despite recoveries, governments may step in with incentives to revive this engine of growth, innovation and high quality jobs.
In summary, business fixed investment includes nonresidential spending on equipment, technology and structures used to produce goods and services in the future. It signals business confidence and rising capacity, which leads overall economic growth. Declines in this area can predict downturns while surges often kick off expansions. So monitoring trends in nonresidential capital expenditure provides key insight into economic conditions.