Business spending is one of the primary measures of the health of the U.S. economy. When companies invest in assets like buildings, equipment or software, they expand their ability to provide goods and services. In turn, such investments fuel job creation, wage growth and consumer spending. Government officials identify trends in business spending by calculating private domestic investments. Investors, business leaders and others can then decide how to spend their money based on the economic signals that these private domestic investment calculations provide.
TL;DR (Too Long; Didn't Read)
To calculate private domestic investments, the net private domestic investment must be equal to the gross minus the capital consumption adjustment.
Taking Economic Measurements
Economists consider assets that support production, like buildings and equipment, to be capital stock. Calculating net private domestic investment helps them measure the net increase in the nation’s capital stock resulting from the investment. The U.S. Department of Commerce’s Bureau of Economic Analysis (BEA) considers net private domestic investment as the official measurement of net capital investment expenditures for the National Income and Product Accounts (NIPAs). They provide a framework for presenting statistics on U.S. economic activity.
Components of Investment
The gross private domestic investment includes fixed nonresidential investment, fixed residential structures and change in business inventories. Fixed nonresidential investments account for the biggest percentage. It includes equipment, structures and intellectual property products, like expenditures for research and development, and for entertainment, literary and artistic originals that provide long-lasting service to businesses.
Fixed residential structures include single-family, multi-family and other properties. Change in business inventories measures the value of the change in the physical volume of the inventories – additions less withdrawals – that businesses maintain to support their production and distribution activities.
Understanding Investment Trends
Each component fluctuates as business conditions shift. For example, fixed nonresidential investments, like spending on computers and software, increased by 6.9 percent from 1992-to-2002 as the internet took off. But the bursting of the dot-com bubble caused the increase to slow to 1.9 percent over the following decade.
The Bigger Picture
The BEA adds gross private domestic investment to personal consumption expenditures and government spending to determine the nation’s gross domestic product. In 2018, gross private domestic investment accounted for $3.65 trillion, or nearly 18 percent of the U.S. GDP, according to the BEA. The Bureau of Labor Statistics projects that gross private domestic investment will account for 18 percent of the nation’s GDP in 2026.
Calculating Net Private Domestic Investment
Net private domestic investment focuses on growth-related spending by accounting for depreciation. It only includes investments that are not used to replace depreciated capital. Net private domestic investment is calculated by subtracting capital consumption adjustment from the gross private domestic investment. As an equation, in which: NPDI = net private domestic investment, GPDI =gross private domestic investment and CCA = capital consumption adjustment (depreciation), it is: NDPI = GPDI - CCA.
Jim Molis has written about money management and financial services extensively during more than 20 years of experience as an editor and writer. He has been a staff writer for The Bond Buyer and a banking and finance reporter for the Atlanta Business Chronicle. He also has written for accountants and wealth advisors and has contributed to numerous publications as a freelancer.