trends. looking at flows to all developing economies, the share of outward direct investment going to these destinations has been about flat over the past decade. foreign direct investment, as a whole, has been rising relative to domestic investment, but gradually over several decades - - a trend that was not picked up in recent years. clearly, none of these explanations is the sole cause of the relatively restrained level of investment. most likely, some combination of these factors along with others we have not identified accounted for the sharp decline in investment in 2001 and 2002 and has contributed to keeping investment spending rising along a lower track subsequently, both domestically and abroad. however, as i noted, several of those factors are of questionable quantitative import, and others no longer seem to provide a rationale for the failure of investment spending to rebound more vigorously. yet, most indicators in hand do not point to a surge in business fixed investment that will restore the trend derived from earlier relationships. instead, the latest reads on business spending and intentions point to continued solid growth in capital spending, supported by favorable fundamentals of steady increases in final demand and a relatively damped cost of capital. over the past three quarters, both orders and shipments of capital equipment ( excluding the volatile aircraft category ) have continued to move up at roughly the steady pace seen since 2003. moreover, orders remained above shipments in the first quarter of this year, leading to another increase in the backlog of orders. in addition, surveys indicate that businesses'capital spending plans and their outlook for sales remain, on balance, in the elevated range that they have occupied for several quarters. a slowing in the growth of consumption and residential investment associated with a cooling in the housing market will exert some restraint on capital investment, but business sales should receive some support from improved markets for our exports. moreover, business spending on structures finally seems to be picking up momentum. the construction data that we have in hand for the first two months of the year suggest a bounceback from the anemic growth in spending on nonresidential buildings that has prevailed over the past few years. this pickup should persist, responding to the recent declines in office and industrial vacancy rates. and expenditures on drilling and mining structures are likely to remain strong, given the current market expectations for elevated energy prices. spending on structures should also get a boost this year from rebuilding in the areas hard hit by last year's hurricanes. the outlook for solid increases in investment spending has both upside and downside risks associated with it

level of investment at the end of last year, $ 1. 3 trillion, was nearly 6 percent higher than the peak reached five years earlier. however, real gross domestic product ( gdp ) expanded nearly 14 percent over the same period. to be sure, the investment peak in 2000 was unusually high ; still, the nominal share of business fixed investment in gdp, at 10 - 3 / 4 percent at the end of 2005, was well below its forty - year average. of course, comparisons of these simple ratios and growth rates do not account for other influences on investment in the macroeconomic environment, such as interest rates, the prices of capital goods, or the rate of increase in final spending. however, a more rigorous exercise using a standard model favored by many forecasters yields a similar conclusion. using lagged net investment, changes in business output, and changes in the user cost of capital to predict the level of current net investment, we find that the model did not forecast the plunge in investment in 2001. and, despite its ability to predict recent growth rates reasonably well, a dynamic simulation of such a model starting in 2000 indicates that the current level of investment is still considerably lower than expected. to be sure, we would not have expected investment to snap back right away, judging from experience. still, investment over the past few years is showing no signs of returning to the path that we would have expected from historical relationships through 1999. business financial statements also reflect evidence of restrained business spending behavior. normally, businesses are heavy net users of savings generated by the rest of the economy. the financing gap - - the level of capital spending over the level of internal funds - - is a measure of that reliance. but it was close to zero in 2002 and 2003 and remained unusually low last year ( after adjustment for tax - induced flows of repatriated foreign earnings ), which suggests that businesses stacey tevlin and charles s. struckmeyer, of the board's staff, contributed to these remarks. didn't see enough profitable investment projects to warrant tapping the markets for external financing, even at low long - term interest rates. to be sure, profit margins and cash flow have been high, but that would also seem to be an environment that should encourage expansion. in fact, businesses appear to be using some of their very large holdings of cash for other purposes. corporations have increased their share repurchases, which hit a record level last year. they have also increased share retirements through cash