Media headlines regarding the publication of the first quarter 2009 US GDP figures concentrated on the 6.1% annualised decline in GDP itself. This was worse than average predictions - which had been for a 4.7% annualised decline. But the most serious development was an unprecedented post-war decline in US investment.
This investment decline is not only dragging the US economy into deeper recession but will have a particular impact in that it precludes any rapid US output recovery.
Analysing first the comparison of the change in US GDP in this business cycle compared to others since World War II, Figure 1 compares the percentage decline in GDP since the peak of the present business cycle, in the second quarter of 2008, with the previous major US post-war economic downturns in 1973 and 1980.
As may be seen, the downturn in US GDP since the second quarter of 2008 is both more rapid and deeper than in any previous post-war business cycle – confirming the by now well established fact that this is the worst US economic downturn since World War II.
However, the downturn in GDP has so far only lasted for three quarters and the total decline to date, of 3.3% is serious but of the same essential qualitative magnitude as the most serious previous post-war economic cycles. It is not, so far, comparable to more serious economic crises – for comparison in 1929-30 US GNP fell by 9.4%.
The conclusion regarding the US GDP itself, therefore, would be that the downturn is very serious but not yet out of the range of previous post-war business cycles. How serious the decline in US GDP will be, therefore, depends on how long the downturn continues and whether US GDP continues to drop.
But the downturn in US investment is of an entirely different and more serious magnitude. Figure 2 shows the downturn in US fixed investment (gross domestic fixed capital formation) in the current business cycle compared to those commencing in 1973 and 1979. As the investment cycle does not always coincide exactly in time with the GDP cycle, in these figures the peak has been taken as the peak of cyclical fixed investment not the peak of GDP.
US investment already started turn down after the first quarter of 2006. As may be seen the present decline in US investment far exceeds those seen in previous post-war business cycles. Furthermore rate of decline of investment was accelerating in the first quarter of 2009.
The total decline in US fixed investment since its peak in this cycle is 23.8%. The year on year decline to the first quarter of 2009 is 18.0%. For comparison it may be noted that the decline in US private fixed investment in 1929-30 was 23.4%. In short if the fall in US GDP in this business cycle does not approach that of 1929 the current decline in US investment is of a qualitatively greater magnitude than any seen in previous post-war business cycles and does approach 1929 levels of decline.
In order to illustrate these trends more clearly Figure 3 shows the changes in the domestic components of US GDP since the first quarter of 2006 - the extremely severe decline in US exports has been analysed elsewhere.
As may be seen while the dimensions of the decline in US GDP and private consumption in this business cycle is relatively moderate, while government consumption overall has not fallen at all, the decline of investment is of extremely severe dimensions.
The result, as may be seen in Figure 4, is not only that US investment has fallen rapidly but its percentage of even a shrinking US economy is declining. US investment has fallen outside its normal postwar range as a percentage of GDP - this US level already being very low in terms of international comparisons.
Comparison to annual figures shows that the proportion of US GDP allocated to fixed investment has now fallen to its lowest level since the immediate post-war reorganisation of the US economy in 1946.
These figures have major implications. In the short term, the decline in investment is dragging the US deeper into recession. But in the medium and longer term such a low level of investment makes it hard to relaunch economic growth.
Furthermore such a level of investment is so low compared to US competitors - China and India both have rates of investment of well over 30% of GDP, that it will lead to further decline in the international competitivity of the US economy.
The implications which flow from the first quarter United States GDP figures are therefore that the US economic downturn is likely to be protracted – which has major implications not only for the United States but for the world economy, and the US economy will continue to fall behind the growth rate of both China and India.