US GDP Growth Since 2009; Investment

The above chart shows the quarter to quarter percentage change in GDP and the contribution from investment.  Here we see a somewhat spottier contribution rate.  There are five quarters where investment contracted-- obviously slowing growth -- and several quarters where investment's contribution was a fairly small. 

The above chart shows the percentage contribution of non-residential (business) investment.  Commercial real estate (dark blue) was negative until 2Q10.  However, once it turned positive it still didn't add much to overall growth.  Equipment (gold) added a great deal to growth for 6 of the 7 quarters mid-way through the expansion.  However, this type of investment dropped off in the last 6-7 quarters.  IP added a touch, but very little overall.

Residential investment can be broken down into two periods.  For the first half of the recovery we see a strong contraction for obvious reasons.  However, for the last seven quarters we see a decent amount of growth in this area.

Overall investment,  as shown in the top chart, has been fair this recovery.  All of the various components have done their part.  However, the overall level is still a bit low at the macro level. 

1955: Investment

This post is part of the Bonddad economic history project. The purpose of this is to go back through the US' economic history, year by year, to see what happened and why it happened.

In 1955, investments occurred on a variety of fronts.  The first quarter saw a huge increased in private inventories, while equipment and software contributed to the second and third quarter growth.  Inventories and business investment was largely responsible for investment growth in the fourth quarter.

The above chart from the Economic Report to the President shows the importance of a variety of construction to overall growth.  Industrial capacity was hitting its maximum, which required businesses to increase structural investment.  The housing boom was underway, leading to the increase in residential investment.

The above chart puts the early-mid 1950s construction boom into perspective.  Notice the incredible ramping up we see in 1954 in the residential area, but also how a variety of sectors contributed to overall growth. 

The above chart shows that real estate mortgages grew strongly for the four years of 1952-1055, but great an an especially strong rate in the 1955.

The Federal Reserve explained the mortgage market situation like this:

The overall state of business investment was explained like this in the ERP:

1954: Investment

This posting is part of the Bonddad Economic History Project.  The purpose of this is to go back sequentially through the US' economic history, starting in 1950, to simply see what happened from the economic side of the equation.  On the right side of the blog, you will see a link to posts that each contain links to the respective years.

The above charts shows investments contribution to GDP in 1954, along with the contribution of various sub-parts of investment.  While we see inventories helping in three quarters, I think the real story here is clear: residential investment was the largest contributor to the overall increase in investment spending in 1954.

Consider  the following chart:

Also consider this chart, from the 1954 Economic Report to the President:

As the Federal Reserve noted in their 1954 report:

Notice the mammoth increase in mortgages for the entire four year period.\\

1953: Investment

The above chart shows the dual nature of 1953's investment picture.  In the 1Q, overall investment added 1.2% to overall GDP growth, with equipment and software accounting for the lions share of the investment.  However, even in the first quarter, we see that inventory investment subtracted a fair amount from growth.  This trend became far more pronounced by the end of the year, when the inventory contraction accounted for a large drop in the overall contribution of investments to GDP growth.

As the Federal Reserve's report for the year explains, the drop in war spending is a big reason for the drop:

After midyear the pace of economic activity slackened appreciably as business buying for inventory dropped sharply and as fresh expansive forces were lacking. At this time reductions in defense spending came to be more widely anticipated. A truce in Korea was agreed to in July, and international tensions appeared to be easing somewhat. Business concerns and the armed services reduced new ordering and, with new orders below shipments, unfilled orders declined sharply from earlier high levels. Reflecting the effect of reduced output accompanying these developments, the buildup of business inventories, which had been at a seasonally adjusted annual rate of 6 billion dollars in the second quarter, was considerably retarded in the third quarter and turned into moderate liquidation in the fourth quarter. At that time, as the chart shows, stocks were being reduced by both manufacturers and distributors. The principal reductions were in stocks of durable goods, which earlier had advanced most.

Here is the accompanying chart:

I'll explain the recession that started mid-1953 in more detail later.  However, as production dropped from the drop in war spending, we also see a drop in consumer purchases of heavier items (cars and furniture/household goods).  Hence, the economy was hit by a double-whammy of declining consumer and government demand.   

1952: Investment

In 1952, we see some pretty wild vacillations in overall gross investment and its contributions to overall GDP.  The first quarter -- which saw GDP increase 4.1% -- saw investment contribute about 36% of overall growth.  The second quarter's figure was incredibly negative which was caused exclusively by a huge contraction in inventory investment.  This was reversed in the third quarter with a move to restock inventories.

Here is how the 1953 Economic Report to the President explained it:

Beginning in the third quarter of 1951, the rate of business inventoiy accumulation declined, as businessmen attempted to bring over-plentiful stocks into line with sales volume. By mid-1952, sellers of such diverse commodities as textiles, apparel, autos, and home appliances appeared to have completed the process of paring down the excess inventories which they had accumulated in the preceding months. Indeed, in some areas retail inventories had probably dipped below the levels required by sales, while business purchasing agents were pursuing a policy of handto- mouth ordering.

During the third quarter, a change became evident as nonfarm inventories were accumulated at an annual rate of 3 billion dollars. Since there was some decline in inventories of steel during this quarter, the rate of accumulation of nonsteel items exceeded 3 billion dollars. Most nondurable goods industries and the nonsteel-using segments of durable goods industries shared in this rise. However, business sales to ultimate consumers did not rise in line with inventories; production and shipment of producers' durables and automobiles fell, largely as a result of the steel strike. But as the final quarter of the year got under way, metal-using firms had already completed in most cases a remarkable recovery. Production and sales of automobiles, appliances, apparel, and almost all types of commodities expanded considerably. At the same time, inventories continued the more rapid climb begun earlier, while government purchases of goods and services rose moderately.

The following chart shows the situation graphically:

The distortions caused by the inventory situation hide the fact that there was a strong investment environment among manufacturing companies.  This was caused primarily by an accelerated depreciation credit that was passed to encourage investment in defense related industries.  Here's a chart that shows the investment situation:

1951: Investment

This post is part of the Bonddad economic history project.

The above chart shows the contributions investment made to GDP in 1951.  The big story above is the massive inventory draw down that occurred throughout the year.  Remember, that in 1950 we saw a massive inventory build as businesses stockpiled items in anticipation of the Korean war demand.  Also note the drop in residential investment, which was caused by the Fed tightening money supply and raising reserve requirements during the year.

The above chart from the 1952 Economic Report to the President puts the investment situation into perspective.  The dotted line at the bottom shows the huge drop in inventories.  Also note the drop in new construction.  However, there is an increase in producer's durable equipment, which shows businesses upping their industrial plant in anticipation of war purchasing.

The above chart shows the overall increase in plant and equipment on the part of business during 1951.  Most of this was war related spending, as businesses anticipated the war effort would increase demand for heavy goods.  This explains the large increase in primary metals, machinery and non-auto transportation equipment.