Tuesday, March 16, 2010

No Recovery Until America Invests Again

by Robert Higgs

The below analysis by Robert Higgs is important in that it outlines the current state of the economy, and what has occurred over the last two years. Of note is the relative strength of consumer purchases versus the weakness of investment spending. This is the type of movement from capital goods spending to consumer goods spending that you would expect based on Austrian Business Cycle Theory, as the economy re-adjusts from the previously Federal Reserve distorted consumption/capital goods structure. The growth that Higgs notes in the government sector also falls in line with what I have stated we are seeing, i.e. a recovery that is in fact a government manipulated recovery. This government manipulated recovery is not the  that will lead to real growth in the economy, as Higgs makes clear. (htBobMurphy)

While most Americans are familiar with the broad ups and downs of the economy and the job market — the stuff of daily headlines — the deeper story of the continuing recession can be found buried in the statistical appendix to the 2010 report of the president's Council of Economic Advisers.

That story: a devastating decline in investment spending.

The government's data reveal that, contrary to popular belief, consumer spending held up fairly well during the recession, falling less than 2% from the fourth quarter of 2007 to the second quarter of '09.

Most of this decline was erased during the third and fourth quarters of 2009, so by the final quarter of last year real private consumption spending was less than 1% below its previous quarterly peak.

Although the drop in private consumption spending obviously contributed to the recession, the drop in private investment spending — primarily business purchases of structures, equipment, software and additions to inventories — was far more significant.

Gross private domestic investment peaked in 2006. Between the first quarter of that year and the second quarter of 2009, it fell precipitously, by nearly 34%.

During the second half of 2009, investment spending increased by only 10%, so that late last year it was still (when measured at an annual rate) running 29% below its early 2006 level.

This huge decline in investment spending portends an extended period of slow economic growth, lasting several years and perhaps longer. Worn-out equipment, obsolete software, ill-maintained structures and depleted inventories are not the stuff of which rapid, sustained economic growth is made.

The current investment drought does not simply reflect the housing bust that followed the residential investment boom that peaked in 2005. To be sure, real residential investment fell tremendously, by almost 53% from 2005 to 2009, with especially rapid declines the past three years. Yet real nonresidential investment also fell greatly last year, by 18% from its 2008 peak.

Even real investment in equipment and software — a category only loosely connected to the housing boom and bust — declined last year by 17% after occupying a high plateau during the preceding three years. Business firms have also fled from inventory investment, trimming their holdings by an unprecedented $125 billion in 2009 after lopping off $35 billion in 2008.

Federal government spending, meanwhile, has raced ahead. From 2007 to 2009, government purchases of newly produced final goods and services — the federal government's "contribution" to GDP — increased by over 13% in constant dollars.

Read the rest here.

Robert Higgs is senior fellow in political economy for the Independent Institute in Oakland, Calif., editor of the Independent Review and author of "Against Leviathan: Government Power and a Free Society."

No comments:

Post a Comment