Friday, February 19, 2010

A Bit on Private Investment

The collapse in private investment has been the principal drag on GDP growth since 2006. From 2006 through the end of 2009, it fell by 28 %, while the other three areas of GDP - private consumption, net trade, and government spending, all improved. It has fallen from 18 % to 11 % of total economic activity as measured by GDP.

Looking at private investment, about 70 % of the drop is from Private Structures (housing), and another 20 % from Equipment and Software.

In terms of GDP stagnation, the recession is almost entirely due to the collapse of investment in housing, and the implosion of the housing bubble. This is not a consumption-led recession. Personal consumption has risen from 69 % of GDP at the beginning of 2006, to 71 % as of quarter 4, 2009. Consumption of services managed to grow every quarter, even during the steepest part of GDP decline.

This suggest a few things. Housing isn't going to come back in a big way. And folks who spent a good part of their careers building houses and working in real estate are going to have a hard time transitioning to another field. Second, strength in services means the wealthy are doing just fine. But the increase in private consumption in relation to GDP means the so-called 'imbalances' haven't gone away, either in the U.S., or it looks like, overseas.

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