Business Fixed Investment
During 2006, real business investment in equipment and software grew 5 percent, slower than the 7 percent average pace during the 3 previous years. Its fastest-growing components included computers, as well as machinery in the agricultural and service sectors. Investment in mining and oil field machinery was also strong, likely in response to elevated crude oil prices, and to the need to replace Gulf of Mexico facilities damaged by the 2005 hurricanes. Investment in heavy trucks has been solid throughout 2006 as trucking firms have been buying in advance of new environmental regulations (on particulate matter emissions issued in 2000 that became effective in 2007), which will raise heavy truck prices in 2007. Aircraft investment, however, declined sharply for the second consecutive year. Software investment posted a strong 7.9 percent gain in 2006, but since 2000, it has grown at only a 3.7 percent annual rate, a noticeable deceleration from the roughly 16 percent annual rate of growth during the 1990s.
The turnaround in investment in business structures (that is, nonresidential construction) during 2006 has been dramatic, with growth at 12 percent, up from an anemic 2 percent gain during 2005. Growth in 2006 was strongest for office buildings, multi-merchandise centers, lodging facilities, and recreational structures. Investment in petroleum and natural gas structures also grew rapidly, reflecting high petroleum and natural gas prices and the reconstruction of the Gulf of Mexico capacity. Investment continued to fall, however, in air transportation structures and medical buildings.
Business investment growth is projected to remain strong in 2007, somewhere in the neighborhood of the 9 percent annual rate of growth during the first three quarters of 2006. Continued growth in output combined with a tight labor market are expected to maintain strong demand for new capital equipment at the same time as corporations are flush with funds for these investments. The financial environment for these investments is favorable. Cash flow (the internally generated funds that are available for corporate investment) was at a record 10.3 percent average share of GDP in the first three quarters of 2006, while nonresidential investment (at 10.5 percent of GDP) was close to its historical average. In the longer run, business investment is projected to grow only slightly above the growth rate of real GDP.