Public and private projects are fueling a new building boom.
My time growing up in Chicago helped me appreciate the power of building. The city, as we know it today, exists because of massive civil undertakings: reversing a river to gain clean drinking water, elevating the whole terrain to stop flooding, and rebuilding the city after most of it was destroyed by fire. Railroads define the city and are still key to the local economy. A strong public plan motivated more private investment, shaping the city as we know it today. Construction projects are often expensive, slow and difficult, but the imprint they make can last for generations.
That spirit of building and rebuilding lives on today, and it’s helping the economy grow. Business investment was the most cheerful component in the reading of second-quarter U.S. gross domestic product (GDP) last week. The report showed that non-residential investment grew at an annualized rate of 7.7%, up from nearly zero the prior quarter. The upswing is encouraging for several reasons. In terms of the broad mix of economic activity, this cycle has been dominated by strong consumer spending. However, as pent-up savings are depleted, consumption cannot continue to grow indefinitely. The boom in investment produced an upward surprise for overall growth, even as consumption moderated.
Additionally, business investment is often a leading indicator of both booms and busts. Managers conserve their resources when the outlook is slow, and wait to make capital expenditures until prospects are brighter. A broad rise in investment, even in the face of rising borrowing costs, is a positive omen for the years ahead.
Business investment is reported in three major categories: structures, equipment and intellectual property. All three showed growth in the second quarter, the first time that has happened in over two years. This is a positive signal for employment. Projects launched today are putting people to work, creating the buildings, machines and systems that will keep people occupied and productive.