Recent data showing the second consecutive drop in investment by US business blotted an otherwise better-than-expected third-quarter GDP report – or did it?
- At a sector level, investment in non-residential structures stands out
- Comparing GDP investment figures and company filings
- Capital spending is slowing, but still growing
Indeed, at the headline level, Q3 private investment in fixed assets dropped by 1.3%, but encouragingly, among the components, residential investment jumped sharply after six quarters of contraction and investment in intellectual property products remained strong.
Sources of disappointment
Less cheerful, though, at least on the face of it, investment in equipment and non-residential structures skidded lower (Exhibit 1).
Half of the decline in equipment investment was an unusual fall in information-processing equipment, particularly computers and peripherals. This follows a big jump in the second quarter and so it may well not recur. Transportation equipment also saw a drop. Investment in this segment has fallen in four out of the last five quarters. But the standout decrease was the drop in investment in non-residential structures.
Exhibit 1: US private investment in fixed assets (quarter-on-quarter change, seasonally adjusted)
Source: BLS. Note: Figures in legend show share of total fixed investment.
Two factors need to be considered when it comes to investment in non-residential structures:
- Much of the fall is concentrated in the energy sector, which is unsurprising as crude oil prices have languished at 25% below their 2018 highs. Rig counts have fallen by a similar amount.
- While the seasonally adjusted figures have dropped over the last six months by USD 9 billion, the non-seasonally adjusted values have actually increased by USD 4.4 billion.
Essentially, while investment has increased, it has not risen by as much as would be expected for this part of the year, hence the seasonally adjusted decline.
GDP and company filings do not align
The difference between the seasonal and non-seasonal figures helps explain another discrepancy: between the business investment figures in the national accounts (GDP) and the capital expenditure reported by companies in their quarterly filings.
While the GDP figures are far more comprehensive than the data from publically traded companies, and they do not measure the same thing, the two sets of figures normally align. Q3 data from corporate filings and analyst estimates shows a 3.3% increase over the previous quarter, while the GDP figures show a 1.5% decline. It looks likely that the private part of the economy is seeing a bigger drop in investment than the publicly traded segment.
Exhibit 2: Capex and change in non-residential fixed asset investment
Source: BLS, FactSet. Note: non-seasonally adjusted data
Companies are still investing
The advantage of corporate filings is that we can get insights into which sectors are not investing, either because of a poorer growth outlook or because of structural changes. For example, the ‘Uberisation’ of the transportation sector might explain part of the fall in transportation equipment investment. As for commercial structures, investment could be shifting to warehouses from (more numerous) shopping malls.
While the GDP data show lower energy sector investment, companies actually boosted Q3 capital expenditure by 8%, marking one of the biggest sector increases. Exxon Mobile drove much of the gain. The decline in the industrial sector stems from Avis Budget Group, while General Electric is spinning off some businesses. In technology, higher investment by Intel and Apple was offset by cuts at Microsoft, Micron Technology, and Dell, leading to a contraction overall.
For corporate America at least, capital expenditure may not be growing as fast as it was, but it is still growing.
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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.