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July 9, 2013: The Recovery in Domestic Fixed Investment Activity

Thoughts from our Domestic Equity Team

Net domestic fixed investment consists of investments in physical assets such as new houses or new factories that are held for one year or more, less any depreciation of existing fixed assets(1). In the post-WWII era (1945-2013), net domestic fixed investment averaged 7.7% of nominal GDP. In 2009, it fell to just 2.1% of nominal GDP. Despite the general economic recovery since 2009(2), this ratio is currently only 3.1% (see chart below), which is well below its historical average and suggests that there is continued upside potential to future fixed investment activity.

The bursting of the housing bubble was one of the key contributors to this massive decline in net domestic fixed investment activity. Net domestic residential fixed investment plummeted from its peak of $529.9 billion in 2005 to only $37.0 billion in 2011. The housing market has begun to recover as seasonally adjusted annualized housing starts increased to 914,000 units as of May 2013 after bottoming at 478,000 units in April 2009(3).

Net domestic nonresidential fixed investment also suffered a significant decline during the credit crisis (it bottomed in 2010 at $93.4 billion after reaching $446.8 billion in 2007), but is on pace to rebound to $298.3 billion in 2013(4). Despite this initial recovery, as a percent of GDP it still remains below its historical average.

We are currently searching for companies that are positioned to benefit from any further recovery in domestic fixed investment activity.

Submitted by: Lee Caleshu, CFA

(1)Normally, for the purpose of accounting, fixed investment refers to "physical assets held for one year or more". Fixed investment is investment in physical assets such as machinery, land, buildings, installations, vehicles, or technology. The amount of fixed investment may be stated "gross" (before taking into account depreciation) or "net" (after depreciation). By subtracting disposals of fixed assets from additions to fixed assets in an accounting period, we obtain a measure of the net (fixed) capital formation. (http://en.wikipedia.org/wiki/Investment)

(2)Nominal GDP is up almost 15% in dollar terms from 2009-2013 (Bureau of Economic Analysis)

(3)Bloomberg

(4)To calculate the depreciation or consumption part of the “net” nonresidential fixed investment data point, we used “consumption of fixed nonresidential capital” for years 1945-2011; however, since 2011 is the most recent year for which data are currently available for that series, we used “consumption of private domestic fixed capital” for years 2012-2013 as a proxy (note: these two data series had a correlation of 0.9999 from 1945-2011).



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