One of the most important financial metrics that gauges the economic performance of a country is its Gross Domestic Product, or GDP. This is calculated by the Bureau of Economic Analysis at the U.S. Department of Commerce. This figure is well-publicized every quarter by economists and politicians, who use it to showcase how well their policies are working.
GDP has four components: personal consumption expenditures, net exports, government expenditures and business investments.
While each of these components is important, the GDP investments portion, known as gross private domestic investments, is the most volatile, but is an accurate indicator of the future performance and direction of the economy.
What Is Gross Private Domestic Investment?
Gross private domestic investment measures the physical investments that go into the economic activity of a country and the computation of its gross domestic product.
GPDI has three categories: nonresidential investments, residential investments and changes in levels of inventories.
Nonresidential investments: These are expenditures by businesses on such items as tools, factories, structures, machinery, vehicles, durable equipment and computers. To calculate this, capital depreciation is subtracted from gross private domestic investment to arrive at the net investment figure, which normally comprises about 70 percent of GPDI.
Residential investments: The residential category includes apartments and houses and makes up around 28 percent of GPDI. Residential fixed investments are further categorized into structures and durable equipment. Structures include both single-family houses and multifamily apartment buildings.
Changes in inventories: For this calculation, inventories include the stock of unsold finished products, goods-in-process of production, raw materials and supplies used in the manufacture of products. Changes in inventories represent about 3 to 5 percent of GPDI. However, this figure is a highly volatile component because it signals business owners' perception of future changes in business cycles. If managers believe that demand for their products will increase, they will quickly ramp up their purchases of raw materials and increase inventories. On the other hand, if management believes that economic activity will decline, they will liquidate inventories.
Performance of GPDI During Recessions
GPDI over the years has averaged between 12 and 18 percent of total gross domestic product. The percentage is at the high end during expansions of the economy and at the low end during business contractions.
Looking back over a few years with data from the Bureau of Economic advisors, you can see the GPDI was at a high percentage of 20.3 percent in the second quarter of 2000. The recession started in the first quarter of 2001 and ended four quarters later. In this period, GPDI dropped to a low of 17.4 percent share of gross domestic product.
The change in the GPDI percentage during the recession that began in the first quarter of 2008 and ended in the third quarter of 2009 was even more dramatic. GPDI was at a high of 19.9 percent before the recession and dropped to a low of 12.8 percent by the time it ended.