Capital spending now shows up in industry output
By Mark Vitner, President & Chief Economist, Piedmont Crescent Capital
Six industry groups supplied 70% of real GDP growth over the past four quarters, up from 34% in 2015-19, although structures, defense and pharmaceuticals have yet to show up in the accounts.
- Growth of 2.2% is unremarkable, but its makeup is not. Real GDP rose at a 2.2% annual rate in the second quarter, matching both the average of the past four quarters and the gain over the year. Equipment investment contributed 0.60 percentage points to that growth (0.12 in 2015-19) and intellectual property products 0.48 (0.34), while structures, residential investment and government together subtracted 0.32.
- Six industry groups supplied 70% of the growth. The groups we map to the seven forces contributed 1.54 of the 2.2 percentage points over the past four quarters, compared with 0.87 of 2.56 (34%) in 2015-19. The AI buildout group alone supplied 0.66 points.
- Information is the largest single piece. The sector accounted for 0.57 percentage points of growth, or 26%, while making up 5.9% of nominal GDP, and data processing & internet publishing supplied 0.40 of that. State data trace 43% of the sector’s contribution to California and Washington, which hold 17% of national GDP.
- Factory-floor industries are growing several times as fast as the economy. Real value added rose 13.3% in fabricated metal products, 11.9% in other transportation equipment, 11.5% in machinery and 8.8% in electrical equipment over the past year, and the reshoring group’s contribution swung from -0.01 points in 2015-19 to 0.19.
- The drop in structures is the end of a federally funded plant boom. Real investment in manufacturing structures fell 25.7% over the past year and sits 34% below its third-quarter 2024 peak, and structures as a whole subtracted 0.21 percentage points from growth. Census data show computer, electronic and electrical plants, the CHIPS-era semiconductor and battery boom, account for 95% of the decline in factory construction, and construction of all other factories is roughly flat.
- Three forces are not yet visible in the aggregate data. National defense contributed 0.06 points (0.08 in 2015-19), chemical products, the industry that includes drug makers, contributed 0.03, and the group we use for Peak 65 contributed 0.46, a steady rather than accelerating pace.
- Imports absorbed part of the boom. Imports subtracted 0.73 percentage points from growth over the past four quarters, double the 0.36 drag in 2015-19, which fits a boom in which much of the computing hardware, along with the HVAC equipment for data centers, is imported.
