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Business investment in US will grow 6.6%: CBO

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The Congressional Budget Office (CBO) projects that business investment in the United States (fixed and in real terms) will increase 6.6% from the fourth quarter of 2021 to the fourth quarter of 2022.

Business investment includes the purchase of new equipment, nonresidential structures, and intellectual property products, such as software.

The CBO also expects each of the three main categories of corporate fixed investment to post solid growth.

It considers that this increase occurs mainly in response to the strong growth in demand, since 2020, for the goods and services that companies produce.

Although share prices fell in early 2022, they remain well above their pre-pandemic levels, providing another boost to investment growth.

In addition, the CBO anticipates that high crude oil and natural gas prices will encourage drilling activity.

However, high costs and shortages of labor and materials are obstacles.

The CBO projects that further improvement in demand for business output will boost real business fixed investment by an average of 2.6% per year from 2023 to 2026.

Business investment

Businesses built real inventories -inished goods, work-in-process, and materials and supplies- at an unusually strong annual rate of $193 billion in the fourth quarter of 2021, contributing 0.9 percentage point to GDP growth that year.

Despite that increase, inventory investment for 2021 as a whole was negative.

A combination of rising demand for goods and shortages of labor and certain commodities (particularly semiconductors) kept December’s inventory-to-sales ratio near its lowest level in 10 years.

The CBO expects the shortage to ease through 2022 and 2023, allowing businesses to rebuild inventories to a level more in line with sales.

Still, inventory investment is unlikely to match the strong rate seen in late 2021.

Lower inventory investment rates than in the fourth quarter of 2021 mean inventories will be a moderate drag on GDP growth over the 2022-2026 period.

In CBO’s projections, real consumer spending grows by 2.9 percent in 2022 and then grows at an average annual rate of 1.7 percent from 2023 to 2026. 

 

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