Thursday, June 25, 2009

The Worrying I in C + I + G + NX

The final figures for Q1 GDP were released this morning and although nothing drastically changed (revised up to -5.5% from -5.7%), the figures for non-residential investment are still important to review.

Investment is important to long-term economic growth and/or recovery. One such study by Brad De Long and Larry Summers on the relationship between equipment investment and economic growth noted:

We find that producers’ machinery and equipment has a very strong association with growth: in our cross section of nations each percent of GDP invested in equipment raises GDP growth rate by 1/3 of a percentage point per year. This is a much stronger association than can be found between any of the other components.
For that reason, a massive drop in investment is not only cause for concern now, but for future and lasting economic growth. And the size of the drop in investment is massive.

Source: BEA