Business investment, part of GDP, reflects the level of optimism

Whether it’s new machines for a factory or better software to manage payments, companies spend because they see opportunities.

This week, we’ll get the government’s initial estimate of GDP for the second quarter. But first, pop quiz: What are the four main components of gross domestic product? Consumption, government spending, net exports and business investment! You knew that, right?

That last chunk, business investment, typically averages about 13% of total GDP, and it includes whatever businesses buy to grow their capacity. Think new machines for a factory floor. Or better software to manage customer payments.

The Q2 data will follow a strong first quarter for business investment, which grew about three times faster than overall GDP in the period, despite the headwinds facing businesses these days. Those include high-ish interest rates, a factor that makes business loans more expensive.

One business making a costly investment right now is 21 Bar & Grill in Keene, New Hampshire. Most days, the taps are flowing and a chef is mixing up homemade buffalo sauce at the restaurant. But on this day, it was different.

“We broke through the wall, finally, today,” said co-owner Beth Wood.

This spring, 21 bought the business next door and is expanding into that space, she said. The move will double seating capacity. Plus, “we had a very, very tiny kitchen, and we are, like, quadrupling the size of our kitchen,” she said.

It’s a pricey move. But Wood thinks it’ll pay off down the line.

“We can now do more private events. We can do off-site catering,” she said.

When lots of businesses make these kinds of investments, it “typically signals optimism,” said Kevin Cummins, chief U.S. economist at NatWest Markets.

Business investment has outpaced overall GDP for three of the past four quarters. But much of that growth has been limited to certain sectors.

Cummins said last year, thanks to federal legislation, “we had this massive surge in manufacturing facilities that really boosted the level of structures investment.”

And the first quarter this year saw lots of investment in intellectual property, said Steve Blitz, chief U.S. economist at consultancy T.S. Lombard.

“A big part of what’s intellectual property is software, so, hence that’s also [artificial intelligence],” he said.

But Holly Wade, executive director of the National Federation of Independent Business Research Center, said she’s seeing some small businesses hold off on new investments right now.

“Waiting to see if interest rates start to decline a little bit. You know, wait another six months, another year for cheaper financing,” she said.

If the Federal Reserve starts cutting rates, more investment may go toward growing those businesses and less toward making interest payments.