Wednesday, October 31, 2012

GDP Part III; Investment

Let's turn our attention to investment.

First, the above chart shows gross private domestic investment.  While the total amount is below the pre-recession level, remember that this figure includes housing (and the housing bubble).  Put another way, the pre-recession number was skewed by the housing bubble in a pretty big way, as demonstrated in this chart:

The red line is total residential construction -- which was seriously out-of-whack during the housing bubble.  Also note that residential investment has been at abnormally low levels for the first few years of this expansion in order to clear excess inventory from the market.

The year over year percentage change in GDI shows a quick rebound after the recession ended (which is to be expected), but also a continuing of a pace in line with the preceding expansions YOY pace.

The chart above shows gross private domestic investment's contribution to GDP growth since the end of the recession.  Notice that investment was very strong coming out of the recession (4Q09-3Q10), dropped in 4Q10-1Q11, picked back up in 2011 (2Q11-4Q11) and has dropped again over the last three quarters.

Gross investment accounts for about 14% of US GDP.  It is broken down into fixed investment and inventory adjustments (which accounts for a very small percentage).  Gross investment is divided into non-residential and residential, with each accounting for 77% and 20%, respectively.  Non-residential is further sub-divided into structures (18% of total GPI) and equipment and software (60% of total GPI).  Let's look at these figures from largest to smallest (equipment and software, residential investment and non-residential investment).

The top chart shows the total value of equipment and software investment and indicates that this figure has completely rebounded from it's recession lows.  The bottom chart shows the YOY percentage change and indicates that the rate of growth quickly rebounded -- within a year of the recession's end.

The top chart of residential investment shouldn't surprise anyone.  Notice the extreme over-investment (read: bubble) before the recession, leading to the crash after the recession.  The second chart shows that the year over year percentage change in residential investment was negative for a large portion of the latest expansion.  However, also notice this has increased into positive territory over the last few quarters.

Finally, we have non-residential investment.  The top chart shows that this component has rebounded, but not to pre-recession levels.  The bottom chart shows that the YOY percentage change has rebounded, strongly from the recession, but has also dropped in 2012 to slower levels.