Gross private domestic investment is the most notable and most often referenced measure of investment in the National Income and Product Accounts (NIPA). It is comprised of (1) business investment in plant and equipment, (2) residential construction and (3) investment. The most important exclusion is government investment, which is treated simply government expenditure. It is very important to most treatments of the multiplier which treat investment as exogenous (coming from outside the system).
Here, however, we attempt to connect the lines between investment, profitability, employment and effective demand. So the only truly exogenous investment arises from government, whose concerns may exist outside the economic sphere.
Volatility appears in both blue and red in gross private domestic investment. The Truman years were wildly up and down in this category, as the demand and supply of consumer goods, industrial capacity, and housing after the war sorted itself out. The disruption of the Korean War further roiled the water. The tremendous spike in Reagan's first term is due in large part to Supply Side tax policy details which actually made some investments cost less than nothing. The modest rise of investment in the 2000's can be attributed in part to the run-up in residential housing. It remains to be seen how passive housing investment translates into economy-wide strength or weakness.
Total private domestic investment grew at an average annual rate of 6.6 percent through the years of Democratic chief executives. Under Republicans, the figure was less than half that, 3.2 percent (through 2004).
