Components of GPDI
Three key factors
Of the four main constituents of GDP, GPDI is the most volatile. Like consumption, GPDI can be broken down into more detailed components:
Fixed nonresidential investment
Fixed residential investment
Change in private inventories
Unlike consumption, while the trends of the underlying components are volatile, there are no underlying long-term trends leading them in a specific direction higher or lower. They are stably unstable:
It’s clear who the boss of GPDI is - fixed nonresidential investment at the top of the chart. And, this makes sense. Because nonresidential investment represents all of the stuff that one would expect businesses to invest in like equipment or new computers or kombucha on tap. It’s the investment a business makes in itself to grow more in the future.
More specifically, it captures net new investments. So, when the kombucha dispenser breaks and the employees threaten to walk out and management gets a new kombucha dispenser to quell the uprising, that wouldn’t be considered a new investment or counted toward GDP because it was just replacing something versus doing something new (i.e. making an investment).
Management preemptively buying two new kombucha dispensers with crowd-pleasing flavors to keep the drones happy and prevent uprisings, however, would be considered an investment and counted toward GDP. The idea generally would be that the investment will lead to more growth in the future, as the business will have happier employees and get new ones because they will choose to work for them over their competitors with less-pleasing kombucha offerings.
Or, in a less-millennial example, a factory owner buys a new machine that allows his employee to be twice as productive in his daily widget making. It’s money spent now as an investment that will lead to growth and return in the future.
The next item is fixed residential investment, which is the line in the middle. We need a place to live so real estate is pretty important so economists like to break this out on its own. If you look closely, you can see the home-owning dreams of millions of millennials evaporate around 2006, when the real estate bubble started bursting and people decided they didn't want to invest in making new places to live and then it never recovered and then after like fifteen years when a bunch of people came of age and wanted to buy a house they were like “where are all the houses?” and everyone collectively shrugged. Depending on which millennial you ask this is either an over or under exaggeration but the key point is that if we look at enough charts we can see interesting trends that may help better explain why things might be they way they are.
Finally, there is change in private inventories, the little line at the bottom that fluctuates around zero. This one is basically businesses either adding to their inventory or drawing it down based on current and future expectations of consumer demand. While it is really small as a portion of total GDP, it is actually a really closely watched metric because it can often give a leading indication of where things are going in the economy. Businesses are smart, so they can see adverse customer behavior before a bunch of stuffy economists sitting in an ivory tower collective decide we are in a recession and ring a bell to let everyone know the bad times are here.
Just like we were able to dig into goods and services, we will look further into nonresidential investment in the next post and see if there is anything interesting there!
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