The suggestion in a previous post that a recovery in US business investment will contribute to significantly stronger second-half GDP growth is supported by July industrial output data.

Equipment spending accounts for 46% of business investment (i.e. private non-residential fixed investment). Six-month growth of industrial output of business equipment rose to 2.0% in July, the fastest since 2014. Output and investment numbers are, unsurprisingly, closely correlated – see first chart.


Structures investment accounts for a further 21% of the business total and has been even weaker than equipment spending, mainly reflecting a collapse in mining exploration. The industrial output component covering oil and gas well drilling, however, bottomed in May, edging higher in June and July. The recovery in the oil price, meanwhile, suggests a significant rebound in both output and investment over the remainder of 2016 – second chart.


Spending on “intellectual property products”, mainly software and R&D, accounts for the remaining 33% of business investment; it continues to grow strongly.

Business investment fell by 1.4% during the first half (i.e. between the fourth quarter of 2015 and the second quarter of 2016), subtracting 0.18 percentage points (pp) from GDP growth, or 0.36 pp at an annualised rate. A reasonable base case is that this decline will be fully reversed during the second half, implying that business investment alone could contribute 0.72 pp to the change in annualised GDP growth between the first and second halves.

The change in inventories subtracted a further 0.79 pp from annualised GDP growth during the first half but is expected here to have a neutral impact at worst during the second half . Total business spending, therefore, may deliver a boost of more than 1.5 pp to second-half GDP expansion.