Gross and Net US Investment

Each year, over half of all investment made by US firms simply serves to replace older equipment and knowledge that has become worn out. Recently, the figure has risen to approximately 75% of current investment, which is simply used to offset the depreciation of older capital. A graph from the Federal Reserve Bank of St. Louis's FRED website illustrates this concept.

The top line displays gross investment, while the bottom line shows "net" investment, which accounts for the depreciation of older capital. As evidenced by the shaded bars indicating economic recessions, firm investment tends to decline during these periods. During the depths of the Great Recession in 2009, all of the gross investment was directed towards replacing depreciated capital, resulting in no growth in the overall US capital stock.

Another figure divides net investment by gross investment. In the 1970s, net investment was typically around 40% of gross investment; however, this proportion has been declining over time. For the past decade or so, net investment has equated to approximately 25% of gross investment, meaning that 75% of the gross investment is merely replacing depreciated capital, while only 25% is adding to the capital stock.

The increasing gap between gross and net investment can be attributed to the fact that modern investment is increasingly focused on information technology rather than large physical machinery. Information technology tends to depreciate more rapidly, necessitating more frequent replacement and updating. This trend implies that achieving a given increase in net investment now requires a larger rise in gross investment compared to several decades ago. Additionally, the US has not historically been an economy characterized by high investment levels.