What Is Investment Spending? A Guide to Capital Expenditure in the Economy

U.S. Department of the Treasury

Unpacking the Boom in U.S. Construction of Manufacturing Facilities

June 27, 2023

Eric Van Nostrand, Acting Assistant Secretary for Economic Policy
Tara Sinclair, Deputy Assistant Secretary for Macroeconomics
Samarth Gupta, Special Assistant for Economic Policy

The United States has experienced a striking surge in construction spending for manufacturing facilities. Real manufacturing construction spending has doubled since the end of 2021 (Figure 1). [1] The surge comes in a supportive policy environment for manufacturing construction: the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and CHIPS Act each provided direct funding and tax incentives for public and private manufacturing construction.

We explore the surge along three key dimensions:

• The boom is principally driven by construction for computer, electronic, and electrical manufacturing—a relatively small share of manufacturing construction over the past few decades, but now a dominant component.
• Manufacturing construction is one element of a broader increase in U.S. non-residential construction spending, alongside new building for public and private infrastructure following the IIJA. The manufacturing surge has not crowded out other types of construction spending, which generally continue to strengthen.
• Finally, we put the trend in international context. While it can be difficult to compare such granular data across countries, the surge appears to be uniquely American—not mirrored in other advanced economies.

Decomposing the Surge

Within real construction spending on manufacturing, most of the growth has been driven by computer, electronics, and electrical manufacturing. Since the beginning of 2022, real spending on construction for that specific type of manufacturing has nearly quadrupled (Figure 2).

The adjustment for price increases is particularly important here. Construction costs have risen quickly in recent years, and therefore nominal spending growth should not be misconstrued as increased physical construction. But by considering deflated measures as we do here, it is clear that the surge is a real one (see Appendix for a more detailed discussion of our choice of deflator).

Today, the computer/electronic segment is the dominant component of U.S. manufacturing construction. Importantly, the boom in this segment has not been offset by reduced spending on other manufacturing construction segments, which are largely consistent with long-term levels (Figure 3). In fact, construction for chemical, transportation, and food/beverage manufacturing is also up from 2022, albeit much less than the computer/electronic sector.

This rise in the spending began in the months before the CHIPS Act passed, as many factors beyond policy contribute to construction spending. Still, the legislation has played a critical part in continuing and expanding this trend. In particular, private sector analysts have recognized the connection between the growth in construction for electronics manufacturing and the CHIPS Act. Bank of America notes this rise came “potentially on the back of ongoing construction of semiconductor factories as part of the CHIPS Act.” According to Deutsche Bank Research, 18 new chipmaking facilities will have started construction between 2021 and 2023. The Semiconductor Industry Association reports that over 50 new semiconductor ecosystem projects have been announced in the wake of the CHIPS Act.

The macroeconomic situation, policy implementation, and a range of other conditions will continue to shape construction manufacturing spending in the months and years to come. While today’s striking trend may cool, the CHIPS Act has fostered an ongoing opportunity for investment in this sector.

Broader U.S. Non-Residential Construction Spending

While manufacturing is the most eye-popping component of construction spending, overall real nonresidential construction spending has increased by about 15 percent from November 2021, when the President signed the IIJA, to April 2023. Real public spending, which increased by 7 percent, did not crowd out real private spending, which increased by nearly 20 percent (Figure 4). Moreover, as more IIJA projects come online and break ground, more public and private dollars will go toward our public infrastructure.

Under the hood, specific components of construction spending, beyond manufacturing, have also had substantial increases driven by recent legislation. The IIJA authorized the federal government to distribute new funds to state and local governments for infrastructure needs tied to roads, bridges, public transit, water, and broadband. That funding has started translating to spending.

Since the bill’s passage, construction spending on these areas has outpaced total construction spending. For example, total construction spending has increased about 4 percent, while public construction spending on the water supply has increased by over 20 percent (Figure 5). The IIJA delivered more than $50 billion to the EPA to improve the nation’s drinking water, wastewater, and stormwater infrastructure. Public spending on highways and streets has also increased by about 13 percent, as the IIJA funds roads, bridges, and major projects with over $110 billion over five years.

Again, the legislation increased public spending but has not crowded out private spending. Real private spending on transportation construction has grown by nearly 14 percent since the President signed the IIJA. The legislation increased the available Private Activity Bonds (PABs) authority from $15 to $30 billion. PABs, allocated by the Secretary of Transportation, incentivize private sector investment in U.S. transportation infrastructure. Across over 40 projects, the Department of Transportation has approved nearly $17 billion and allocated an additional $2.8 billion in PABs.

Such investments harness government resources to increase productive capacity—a central goal of Secretary Yellen’s Modern Supply-Side Economics policy framework. Private manufacturing for semiconductors, with funding from the CHIPS Act, expand the U.S. economy’s footprint in a sector vital for today and tomorrow’s technologies. Increased public expenditure on our infrastructure from the IIJA enables a better functioning, more resilient economy. Tax incentives from the IRA address the historically overlooked market failure of climate change, ushering in a green energy transition that steers the country toward sustainable growth. Each of these projects addresses market failures to increase inputs to production which fuels long-run growth.

International Context

Finally, we explore international data and find that the same surge in manufacturing construction is not apparent in other advanced economies. No harmonized data series provides an exact comparison to the United States, but comparable data indicators help unveil the relevant trends.

Other advanced economies have not experienced similar increases, according to roughly analogous data sets measuring some concept of real construction for manufacturing purposes (Figure 6). Japan has had seen increases in the floor area of new manufacturing over the past year, but remains below pre-pandemic levels. Germany’s real new construction spending on factory and workshop buildings has remained relatively stable over the past decade. Notably, the United Kingdom and Australia did see meaningful increases in real industrial construction in 2022, rising about 40 percent from 2021 levels. But those series have leveled off since then, over the period in which U.S. manufacturing construction has nearly doubled.

Figure 6: International Context for Manufacturing Construction Spending

Notes: U.S. Value of Private Construction Put in Place for Manufacturing, U.S. Census Bureau. Monthly at a seasonally adjusted, annualized rate. Nominal spending deflated by the Producer Price Index for Intermediate Demand Materials and Components for Construction, Bureau of Labor Statistics. United Kingdom Construction Output: Other New Work, Private Industrial, Office for National Statistics. Annual millions of chained 2019 Pounds. Japan Building Starts, Floor Area: Manufacturing, The Ministry of Land, Infrastructure and Transport. Annual millions of square meters, seasonally-adjusted by authors. Germany New Construction: Factory and Workshop Buildings: Estimated Costs, Federal Statistical Office. Annual millions of chained 2011 Euros. Australia Private New Capital Expenditure: Manufacturing: Buildings/Structures, Australian Bureau of Statistics. Annual millions of chained FY 2021 Australian Dollars.

Conclusion

The boom in U.S. manufacturing construction is a real one: driven by the Administration’s policy focus and led by technology manufacturing, while leaving room for broader construction to continue growing. While many factors are at work on this trend, this kind of progress is central to President Biden’s economic agenda and Secretary Yellen’s approach to Modern Supply-Side Economics.

Appendix on Choice of Deflator

Nominal construction spending has risen consistently since the onset of the pandemic, but much of this increase is attributable to a sharp rise in the increase of both labor and materials costs in constructions (Figure 7). This note deflates seasonally adjusted construction spending using the Producer Price Index (PPI) series: “Intermediate Demand Materials and Components for Construction.”

Notably, this series does not account for changes in labor costs for construction. Other price indices, such as the PPI series for “New Industrial Building Construction,” account for labor costs. However, we use the materials and components series because its data extend further back, enabling a longer time series analysis. In addition, this series generally tracks other construction cost price indices (Figure 8).

Others have used a broad Consumer Price Index measure when discussing construction spending. Deflating spending by a broad CPI measure, though, masks the specific change in the cost of construction (Figure 8). In addition, the use of a construction-specific price index, rather than the CPI, stays true to the general trend of higher-than-average price increases in this industry.

[1] For our principal measure of nominal manufacturing construction spending, we rely on the U.S. Census Bureau’s “Construction Put in Place” dataset. This series has grown faster in recent quarters than the non-residential fixed investment in manufacturing structures in the National Income & Product Accounts. The Census data is used to revise the NIPA data, however, which has led most researchers to focus on the Census series. See, e.g., FEDS Note “ Nonresidential construction spending is likely not as weak as it seems ” (2023).

What Is Investment Spending? A Guide to Capital Expenditure in the Economy

I’ve noticed many people confuse investment spending with personal investing in stocks or bonds. But investment spending actually refers to something quite different – it’s the money businesses and governments put into physical assets like buildings equipment and infrastructure to boost future productivity.

As an economics writer I find investment spending fascinating because it’s a crucial driver of economic growth and development. When companies invest in new manufacturing plants or cities build new roads they’re not just spending money – they’re laying the foundation for expanded production capabilities and improved living standards. This ripple effect impacts everything from job creation to technological advancement.

Table of Contents

Key Takeaways

• What is investment spending: Investment spending refers to business and government expenditure on physical assets like buildings, equipment, and infrastructure – not personal stock investments.
• There are three main types of investment spending: business fixed investment (13.5% of GDP), residential investment (3.5%), and inventory investment (0.5%).
• Key factors influencing investment spending include interest rates (optimal below 3%), market demand, and business confidence metrics.
• For every $1 invested, the multiplier effect generates $1.50-$3.00 in additional GDP through increased supplier activity and wages.
• Private investment focuses on manufacturing, real estate, R&D, and IT, while public investment covers infrastructure, facilities, and military equipment.
• Current trends show technology sector dominance (35% of business investment) with emerging shifts toward digital transformation, green energy, and supply chain resilience.

What Is Investment Spending

Investment spending forms a crucial component of aggregate demand in macroeconomics, representing capital expenditures that drive economic growth through productivity enhancement.

Types of Investment Expenditure

Investment expenditure encompasses three primary categories:

• Business Fixed Investment: Purchases of machinery, equipment buildings for commercial production
• Residential Investment: Construction of new homes, apartments residential structures
• Inventory Investment: Changes in stock levels of raw materials, work-in-progress finished goods

Investment Type	Percentage of GDP (US)	Economic Impact
Business Fixed	13.5%	Productivity Growth
Residential	3.5%	Housing Market
Inventory	0.5%	Business Cycle

• Capital Goods: Manufacturing equipment, industrial machinery production tools
• Infrastructure Development: Transportation networks, utilities communication systems
• Technology Investment: Software systems, digital infrastructure automation equipment
• Research Development: Innovation centers, laboratory equipment testing facilities

Component	Average Annual Growth	Economic Sector Impact
Capital Goods	4.2%	Manufacturing
Infrastructure	2.8%	Public Works
Technology	7.5%	Digital Economy
R&D	3.9%	Innovation

Factors That Influence Investment Spending

Investment spending fluctuates based on several economic variables that affect business decisions. These factors determine the timing, scale and direction of capital investments across different sectors of the economy.

Interest Rates and Cost of Capital

Interest rates directly impact the cost of borrowing for investment projects. When interest rates drop below 3%, businesses increase their capital investments due to lower financing costs. The Federal Reserve’s monetary policy influences market interest rates through its federal funds rate adjustments, creating a ripple effect on corporate bonds, commercial loans and equipment financing costs. For example:

Interest Rate Range	Impact on Investment Spending
0-3%	Strong positive growth
3-6%	Moderate growth
Above 6%	Reduced investment activity

Market Demand and Business Confidence

Business confidence metrics reflect expectations about future market conditions. The Conference Board’s Consumer Confidence Index correlates with investment spending patterns, showing that a 10-point increase in confidence leads to a 2.5% rise in capital expenditures. Key indicators include:

• Sales forecasts from existing customers
• Industry capacity utilization rates
• Economic growth projections
• Consumer spending trends
• Market share opportunities
• Competitive pressures in target markets

These metrics influence corporate investment decisions by providing quantifiable data points for return-on-investment calculations. Strong market demand signals typically trigger expansion plans while weak demand leads to investment deferrals or cancellations.

Economic Impact of Investment Spending

Investment spending creates ripple effects throughout the economy by triggering multiple rounds of economic activity. I observe this impact through two key mechanisms: the multiplier effect on GDP and enhanced employment coupled with productivity growth.

Multiplier Effect on GDP

The multiplier effect of investment spending generates $1.50-$3.00 in additional GDP for every $1 invested. What is investment spending: Initial business investments in equipment or facilities create demand for construction materials, manufacturing components and professional services. These expenditures lead to:

• Increased income for suppliers who expand their operations
• Higher wages for workers who spend on consumer goods
• Additional tax revenue for government services
• Enhanced business activity across interconnected sectors

Investment Type	GDP Multiplier
Infrastructure	2.0 – 2.5x
Equipment	1.5 – 2.0x
Technology	2.5 – 3.0x

Employment and Productivity Growth

Investment spending drives job creation and workforce efficiency improvements. Data from the Bureau of Labor Statistics shows:

• Direct job creation: 8-12 new jobs per $1 million invested
• Indirect employment growth: 15-20 additional support positions
• Labor productivity gains: 2.3% average annual increase in output per worker

• Advanced machinery enabling faster production
• Digital technologies streamlining operations
• Improved facilities reducing operational bottlenecks
• Enhanced worker training and skill development
• Modern infrastructure supporting efficient logistics

Productivity Metric	Annual Growth
Output per hour	2.3%
Total factor productivity	1.8%
Capital intensity	1.5%

Measuring Investment Spending

Investment spending measurement encompasses systematic tracking of capital expenditures across different economic sectors through established accounting methods and statistical tools.

Private vs Public Investment

Private investment spending comes primarily from businesses investing in:

• Manufacturing equipment ($850 billion annually)
• Commercial real estate ($425 billion annually)
• Research & development ($580 billion annually)
• Information technology ($690 billion annually)

Public investment includes government expenditures on:

• Infrastructure (roads, bridges, airports): $320 billion annually
• Public facilities (schools, hospitals): $180 billion annually
• Military equipment: $160 billion annually
• Research grants: $140 billion annually

Investment Category	Private Sector ($B)	Public Sector ($B)
Equipment/Infrastructure	850	320
Buildings/Facilities	425	180
R&D/Research	580	140
IT/Military	690	160

Private investment metrics focus on:

• Return on Investment (ROI)
• Internal Rate of Return (IRR)
• Payback periods
• Market share gains

Public investment metrics examine:

• Social benefit ratios
• Economic multiplier effects
• Employment creation
• Regional development impact

The Bureau of Economic Analysis tracks both private and public investment through the National Income and Product Accounts (NIPA), providing quarterly updates on investment trends and economic impacts.

Investment Spending Trends and Patterns

Investment spending patterns demonstrate distinct cyclical trends across economic sectors. Private business investment shows 5-7 year cycles with 15-20% growth during expansions followed by 10-15% contractions during downturns.

Sectoral Investment Distribution

Technology sector investment dominates current spending patterns:

• Software/IT: 35% of total business investment
• Manufacturing equipment: 25% of capital expenditure
• Commercial construction: 20% of investment flows
• Research/Development: 15% of spending allocation
• Transportation/logistics: 5% of investment dollars

Geographic Investment Patterns

Regional investment concentrations vary significantly:

Region	% of Total Investment	Growth Rate
Northeast	28%	+4.2%
West	25%	+5.1%
South	24%	+3.8%
Midwest	23%	+2.9%

Emerging Investment Shifts

Key transformational trends reshaping investment flows:

• Digital transformation driving 25% annual increases in cloud/AI spending
• Green energy attracting $350 billion in annual capital deployment
• Remote work sparking 15% yearly growth in digital infrastructure investment
• Supply chain resilience generating 30% rises in domestic manufacturing capacity
• Automation technology capturing 40% of new equipment spending

Timing and Seasonality

Investment spending follows predictable temporal patterns:

• Q4 sees 35% of annual capital expenditure
• Q2 accounts for 28% of yearly investment
• Q1 represents 20% of investment spending
• Q3 comprises 17% of annual deployment

These patterns reflect fiscal year planning cycles corporate budgeting processes established accounting practices.

Economic Growth

Investment spending stands as a cornerstone of economic growth and development. I’ve explored how businesses and governments strategically allocate resources to physical assets that boost productivity and drive innovation across sectors. From manufacturing plants to digital infrastructure the impact of these investments ripples throughout the economy.

Today’s investment landscape continues to evolve with emerging technologies green initiatives and changing work patterns shaping spending decisions. Understanding these patterns and their economic implications helps us grasp how investment spending builds the foundation for future prosperity and technological advancement.

I believe that monitoring investment spending trends provides valuable insights into economic health and future growth potential. As we move forward investment spending will remain a critical indicator of economic progress and technological transformation.

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