1Q24 GDP: Looking into the Investment Layers
We get into the Fixed Investment and Government lines of 1Q24 GDP as the numbers push back on contraction scenarios.
Much of the GDP focus stays on PCE for good reason as the dominant driver of the economy, but the fixed investment lines came up quite healthy in 1Q24 with only Structures falling just short of all-time highs in the mix.
Manufacturing structures are running at high absolute rates and that investment line is operating in a different zip code than the pre-COVID years.
The Equipment line has been under scrutiny with all the noise in the Transportation sector with recent aircraft setbacks while we see lower auto/truck volumes than before 2020. Equipment still hit a high in 1Q24 on strength in Industrial Equipment and Information Processing.
Fixed investment in “IP” (Intellectual Property products) kept on running to new highs in 1Q24.
In this commentary, we run through the line items and categories of the GPDI lines (Gross Private Domestic Investment) of the GDP accounts as we covered in this morning’s release (see 1Q24 GDP: Too Much Drama 4-25-24). This is a drill we got used to doing in bygone years since it demystified the buckets of investment. The exercise also offered a means to put those lines in micro level context from corporate and industrial capex to areas such as aircraft, autos, commercial vehicles, ag and machinery equipment, etc.
The tables tell a story even if they give eye strain. The 1Q24 quarter has a lot in common with the 4Q23 numbers (see GDP and Fixed Investment: Into the Weeds 1-25-24), and the growth to mostly all time highs is significant.
Some of the buckets such as manufacturing structures and warehouses tell a very interesting story while others not so much. This construction cycle has been an extremely important part of the investment trends this cycle (see links at bottom) while it took autos a while to get its supplier chain back to normal. Freight and logistics have a lot going on in the Warehouse section of structures with the rise of Amazon and the need for more secular changes at companies such as UPS and FedEx (see FedEx: Stability Counts, Complexity Challenges1-23-24, Credit Crib Note: FedEx Corp (FDX) 1-22-24).
The above chart gets into the Nonresidential Structures line and Equipment categories. Overall, we see a minor dip in Structures for the only major investment line that declined sequentially.
Mining and E&P are dramatically lower than the 4Q14 period noted in the chart but are well off the crash of 2016. Commercial and Healthcare remain at high run rates relative to the pre-COVID period despite the minor sequential decline. Manufacturing has been the big story with the mix of legislative support and investments in such areas as EV supplier chain capex (IRA) and semiconductors (CHIPS Act). See the construction links at the bottom of the commentary.
Equipment is one of the largest categories outside the PCE category with information processing leading the way. We look at Equipment in more detail further below. While Transportation has been a headliner from autos to aircraft, the capital goods reinvestment cycle and investment in supplier chains and modernization has been playing out in industrial capex. These themes will be critical after the election as trade and tariffs and the onshoring/reshoring trends get more clarity in the action on the ground and government policy.
The above chart breaks out more of the Structures lines. Warehouses have been a big growth market for a while with the rise of Amazon and smart warehouses, supplier chain investment (“just in case” vs. “just in time,” etc.) and the need to upgrade supplier chain planning and inventory management to prepare for what could be escalating trade tension into 2025 and beyond.
The Manufacturing investment has also been the story of this post-COVID cycle. We see the 1Q24 manufacturing investment level almost triple that of 4Q19 ahead of COVID and over 3x 4Q20. The spending on structures brings multiplier effects in employment and spending on equipment since those construction projects require equipment and technology outlays.
The chart details the recent volatility of Transportation (aircraft and autos), the secular increases in information processing, and the signs of cyclical strength in industrial equipment. The Equipment category has a lot of variety, and it is one where the next leg of the secular journey will revolve around trade battles and questions such as “Where is the Equipment made?” and “Where are the buyers located?” Reshoring and onshoring capex, legislative incentives, and trade sticks/carrots will make for interesting times in 2025.
The above chart plots the timeline for IP vs. Equipment as the two largest buckets in nonresidential fixed investment. Both are at highs as of 1Q24 with IP clearly the less volatile line item across time as technology serves so many different end markets in a service economy.
The above chart shows the running history of GPDI vs. Government investment and consumption as the two major categories outside PCE that comprise GDP. Both are at highs at 1Q24. The theory is Government will go down under the economic bias of the Freedom caucus or go up if the Progressive wing carries the day.
We have a hard time seeing how Defense will not go up – and by a lot – in coming years. That said. State and Local is 63% of the Government line and 10.9% of GDP. Defense is only 20% of the Government total (3.6% of GDP) and Nondefense Federal only 16% of government (2.8% of GDP). That is a lot of decision makers in the chain.
Contributors:
Glenn Reynolds, CFA glenn@macro4micro.com
Kevin Chun, CFA kevin@macro4micro.com
See also:
1Q24 GDP: Too Much Drama 4-25-24
4Q23 GDP: Final Cut, Moving Parts 3-28-24
4Q23 GDP: Second Estimate, Moving Parts 2-28-24
GDP and Fixed Investment: Into the Weeds 1-25-24
4Q23 GDP: Strong Run, Next Question is Stamina 1-25-24
3Q23 GDP Final Cut: Swing and a Miss on 5%, Good Contact on PCE Prices 12-21-23
Tale of the Tape in GDP: Trump vs. Biden 12-4-23
Construction Spending: Timing is Everything 12-1-23
Construction: Project Economics Drive Nonresidential 10-2-23