Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. Business fixed investment has held at roughly the same share of U.S. GDP as before COVID, a better outcome than after every other recession since 1980, when investment typically fell as a share of GDP and contributed less well into the recovery. American businesses invested $430bn more than if investment had followed its usual historical pattern.

Eric Van Nostrand U.S. Department of the Treasury
Date Posted:

US business investment is at least $430B higher than if it had followed the pattern of fixed investment as a share of GDP for all US business cycles since 1971.

Has business investment held up better than in past recoveries?

Core argument: U.S. business fixed investment has held roughly the same share of GDP as before COVID, a better outcome than after every other recession since 1980, whereas investment typically falls as a share of GDP and contributes less well into recovery.

Figure 1 shows business fixed investment as a share of GDP since the COVID business cycle peak (blue), compared with the analogous period in the Great Recession and Recovery (orange), and the average behavior in all U.S. business cycles since 1971 (dotted). Typically, investment tends to fall as a percent of GDP in a recession and to continue to contribute less well into the recovery.  This was especially the case in the 2008 Great Recession, when business investment as percent of GDP fell by more than 2 percentage points.  In recent years, business investment has bucked that trend, remaining at roughly the same share of GDP since before COVID: a better outcome than after every other recession since 1980. Indeed, in this cycle, American businesses invested $430 billion more than if overall growth had been the same but investment followed its usual historical pattern. Factory construction has contributed almost one-third of business investment growth since the end of 2021.

Takeaways by Macro Roundup® AI

  1. U.S. business fixed investment has held roughly the same share of GDP as before COVID, a better outcome than after every other recession since 1980, whereas investment typically falls as a share of GDP and contributes less well into recovery.
  2. American businesses invested $430 billion more in this cycle than if overall growth had been the same but investment had followed its usual historical pattern.
  3. Factory construction has contributed almost one-third of U.S. business investment growth since the end of 2021, while in the 2008 Great Recession business investment as a share of GDP fell by more than 2 percentage points.

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  • Making Manufacturing Great Again — US manufacturing construction spending has more than doubled over the past year and risen as a share of gross domestic product, a surge attributed to two laws: the Inflation Reduction Act, whose core is green energy subsidies, and the CHIPS Act, which promotes domestic semiconductor production.
  • The AI Transition One Year Later: On Track, but Macro Impact Still Several Years Off — Investment in AI hardware is projected to rise substantially as a precursor to integrating AI into business processes, with the investment cycle estimated to peak at 2–2½% of GDP and early signs visible among AI-enabling companies. The authors estimate generative AI could raise developed-market labor productivity growth by 1.5pp annually over a 10-year adoption period, roughly 15% cumulatively.
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