September 24, 2020

Off the Charts: Business Investment Rebounds Even as Recovery Drags

The government’s estimate of first-quarter gross domestic product last week indicated the overall economy was only 8.3 percent higher than it was in the second quarter of 2009, the quarter the recession ended. That is significantly weaker than the recoveries that followed the recessions that ended in 1982, 1991 or 2001. After this much time, the economy had grown at least 11.4 percent (after the 2001 downturn) and as much as 21.3 percent (following the 1982 low).

That subpar performance can be traced to two of the three pillars of the American economy — consumers and the government. But the third, business, has made an impressive bounceback.

The accompanying charts cut the economy into three sectors, and show how each of them performed in comparable periods after the previous recessions, as well as this one. All start at the level during the quarter that the National Bureau of Economic Research determined the downturn ended. Together, the three exclude only two contributors to G.D.P. growth — changes in the trade balance and in business inventories.

The business segment consists of private fixed investment in everything from buildings to computers, but excludes residential construction. That is included in the consumer category, which also includes personal consumption expenditures. The government category includes spending by all three levels of government, federal, state and local.

Business investment in the first quarter of this year was 21 percent higher than it had been in the quarter when the economy bottomed. That was not quite as large an increase as followed the 1991 bottom, but it is more rapid than the increases that occurred during the recoveries that began in 1982 and 2001.

Corporations as a group are doing well. Corporate profits, as a percent of G.D.P., rose to record post-World War II levels in 2012, and the effective income tax rate on those profits remains lower than it was in any of the past recoveries, according to government estimates. The government has not yet estimated first-quarter corporate profits.

After past recessions, there has often been an immediate explosion in consumer spending as pent-up demand comes to the fore, and as the housing industry rebounds rapidly. That did not happen this time, in large part because of the nature of the boom in the 2000s, which included excessive investment in houses and consumers taking on debt to support their consumption. The resulting hangover has depressed the recovery in consumer spending to just 8.6 percent after 15 quarters, well below the pace of any of the previous three rebounds.

That is starting to change, however. The pace of growth in nonresidential investment is slowing, but residential investment is starting to take off. And personal consumption expenditures climbed at an annual rate of 3.2 percent in the first quarter, the fastest pace in more than two years.

Whether those gains can continue, as the payroll tax increase and the federal government sequester increase their impact, remains to be seen.

The government sector has been shrinking almost continually since the end of the recession. The decline in state and local government seems to have begun to slow down, but the decline in federal spending appears to be picking up and is likely to continue to be a drag on the American economy.

Floyd Norris comments on finance and the economy at

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