The Investment Recession by Brien Desilets

This article, The Investment Recession (Brien Desilets, October 2012), argues that the 2008–2009 downturn and the sluggish recovery that followed were driven primarily by a collapse in private investment rather than declines in consumption or government spending. While U.S. GDP growth slowed steadily after 2004 and turned negative in 2008–2009, consumption fell only modestly and government spending actually grew, leaving private investment—down $773 billion from 2006 to 2009—as the largest drag on the economy. The analysis shows that even by 2011, private investment remained well below pre-crisis levels, contributing to weak overall growth. Desilets contends that the American Recovery and Reinvestment Act failed to adequately address this shortfall, as infrastructure-related investment accounted for less than $120 billion, far below what was needed to offset the collapse. He concludes that a large-scale infrastructure stimulus, supported by historically low interest rates and bipartisan appeal, is the most effective path to restore robust growth and prevent prolonged stagnation

1. The Investment Recession
Brien Desilets
October 2012

The recession of 2008-2009 is not well understood and for this reason the remedies offered have not delivered a
robust economic recovery. This brief article reviews the experience of the various components of the economy
to illustrate the point that what caused the recession and what still drags on the economy is the severe decline
in Private Investment. The American Recovery and Reinvestment Act and government spending as a whole have
not addressed the aggregate reduction of $775 billion in real terms of Private Investment that began before the
recession and the low levels of Private Investment that continue to drag on the economy. Given the immense
infrastructure investment needs of the country, there is ample room for public investments in infrastructure to
offset the reduced levels of Private Investment. Historically low interest rates support the case for borrowing
now to finance this infrastructure investment. And, a focus on Government Investment in infrastructure instead
of Government Consumption and transfer payments is likely to receive broad political support.

GDP. Overall economic growth peaked in 2004 at 3.5 percent then dropped to 3.0 percent in 2005, 2.7 percent
in 2006 and 1.9 percent in 2007 before sliding into recession with -0.3 percent decline in 2008 and -3.0 decline in
2009. The economy rebounded sharply in 2010 with 2.4 percent growth but cooled to 1.8 percent growth in
2011. An analysis of how the various components of GDP fared during the recession reveals where the
weaknesses in the economy are and provides some insight to how to sustain an economic recovery.

Private Consumption. Consumption actually fell relatively modestly in real terms, from a peak of $9.3 trillion in
2007 to a trough of $9.0 trillion in 2009, a fall of approximately 2.5 percent over a two-year period.
Consumption already has recovered to above its pre-recession level. In 2011, it reached $9.4 trillion, up $165
billion from its 2007 peak. It continued to grow in 2012 at an annual rate of 2.4 percent in the first quarter and
1.5 percent in the second quarter. Although, assuming the average 2000-2007 growth rate of 2.7 percent,
consumption should have reached $10.3 trillion in 2011.

Government. Government consumption expenditures and gross investment did not fall at all during the
recession. Government has experienced a moderate growth rate over the past 30 years, smaller than that of
GDP as a whole which means its share of GDP has been shrinking. In 1980, Government accounted for more
than 23 percent of GDP and it reached a low of 18.4 percent of GDP in 2007. Its portion rose to 20.3 percent in
2009 but fell off again to less than 19 percent in 2011. Government spending grew 2.6 percent in 2008 and 3.7
percent in 2010, then less than 1.0 percent in 2010 before falling 3.1 percent in 2011. It has continued to fall in
2012, down 3.0 percent in the first quarter and 0.7 percent in the second quarter on an annual basis. In real
dollar terms, Government spent and invested a peak of $2.6 trillion in 2010, falling off to $2.5 trillion in 2011.
The net total change in Government spending since 2008 was $26.5 billion.

Government spending can be divided into consumption and investment. In percentage terms, Government
Investment peaked as a portion of total Government spending at 17.2 percent in 2008. It has fallen every year
since then and stood at 15.8 percent in 2011. In real dollar terms, both Government Consumption and

2. Government Investment peaked in 2010 at $2.2 trillion and $431 billion respectively, falling to $2.1 trillion and
$400 billion in 2011.

X-M. Net exports suffered dramatically during the recession, falling more than any other category of GDP. This
is less of a concern for US producers than for overseas producers and importers since the US runs a trade deficit
and a decrease in net exports indicates a decrease in imports, not an increase in exports. Net exports
experienced negative growth rates of 11 percent in 2007, then nearly 24 percent in 2008 and another 28
percent in 2009. In dollar terms, our net exports shrank from -729 billion in 2006 to -355 billion in 2009,
recovering to just under -420 billion in 2010 and dropping again to -408 billion in 2011. Imports peaked at $2.2
trillion in 2007 then fell off to $1.9 trillion in 2009, rebounding to $2.2 trillion in 2011. Exports dropped more
than 9.1 percent in 2009, from $1.7 trillion to $1.5 trillion, then rebounded quickly to $1.7 trillion in 2010 and
$1.8 trillion in 2011.

Private Investment. In terms of growth rates, Private Investment was the second most affected component of
GDP during the recession. However, since Private Investment constituted more than 17 percent of the economy
going into the recession, in dollar terms it was the most impacted component during the recession so it
contributed the most to the overall recession in GDP. From 2006-2009, Private Investment in the economy
shrank by more than $773 billion, or 5.9 percent of pre-recession GDP. Private Investment stood at $1.7 trillion
in 2011, $488 billion less than its 2006 peak although up $286 billion from its 2009 trough. It experienced
growth of 6.1 percent on an annual basis in the first quarter of 2012 and 0.7 percent in the second quarter.
Except for the past two years, Private Investment has not been this low since 1998. While much of this decrease
was experienced in the housing market which was overheating and in need of a correction, as the recession took
hold and the wider economy was affected, firms and households cut back on investments of all types.

The Need for an Infrastructure Stimulus. It is clear from this analysis that the recession was a recession mainly
of Private Investment. Yet there has been no investment stimulus offered by the government to replace the
reduced levels of investment that still persist in the economy. The American Recovery and Reinvestment Act of
2009 included less than $120 billion of tax benefits, contracts, grants, loans and entitlements that support
infrastructure investment. Government spending has increased by a total of only $26.5 billion in real terms
since the onset of the recession and actually fell in 2011 in terms of both Government Consumption and
Investment. These numbers are insufficient to counter the $773 billion drop in Private Investment.

The need for new and improved infrastructure throughout the US is well documented and catalogued by
federal, state and local government agencies around the country as well as by industry groups and nonprofit
organizations. As infrastructure is an investment in the US economy that supports economic growth, creates
jobs and supports businesses, it is a bipartisan issue and one that receives broad support across the political
spectrum. There is no reason to wait any longer for an expanded infrastructure stimulus to bolster the economy
and prevent a double-dip recession and more lackluster growth.