What Happened to Business Investment in 2Q?

As the U.S. consumer gained confidence in the second quarter of 2016, data from the Commerce Department released Friday showed businesses investment didn’t quite keep up.

Continue Reading Below

The first read on second-quarter GDP showed the U.S. economy grew at a 1.2% annualized pace, up from a 0.8% growth rate in the first quarter, but far below consensus expectations for a 2.6% pace.

Perhaps the biggest shock to Wall Street was the sharp drop in inventory building from American businesses. Digging into the data, non-residential fixed investment dropped at a 2.2% annualized rate in the quarter, shaving 0.28 percentage point off of GDP, while the total change in private inventories erased 1.16 percentage point from 2Q GDP.

As businesses slowed down during the quarter, consumers continued to spend at a robust pace of 4.2% from the first quarter, the most since late 2014. The 3% jump in services spending was the most in six quarters, likely aided by improved household finances, continued job growth and firmer wages.

“The staggering subtraction from inventory building was the biggest surprise to us and the market with the story likely being that businesses were caught off guard from the surge in consumer demand and were playing it safe in terms of restocking shelves,” BNP Paribas economists Paul Mortimer-Lee and Bricklin Dwyer said.

They estimated non-residential investment would likely see a bounce back in the third quarter as businesses begin to believe the uptick in consumer confidence and spending will be longer lasting than originally expected. Additionally, the BNP economists pointed out a period in 1986 was the only time in which the change in private inventories remained negative for two-consecutive quarters outside a recession.

Continue Reading Below

More on the U.S. Economy