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Back to the future for investment spending?

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Snapshot for July 31, 2002.

Back to the future for investment spending?
The recession is more than a year old, and the recovery remains weak at best, as the most recent advance estimates from the Bureau of Economic Analysis show. One sector of the economy that could help to boost the recovery is investment spending.

Business investment is notoriously volatile and can often be found at the heart of a recession. During the current economic downturn, business investment spending has been declining quite significantly. In fact, beginning with the fourth quarter of 2000, business investment has declined for seven consecutive quarters-its longest slide in the postwar era.

Investment as a share of GDP

The decline in investment already has erased many of the gains made during the 1990s. Investment boomed in the 1990s, helping to recover most of the territory investment previously had lost as a share of GDP in the 1980s. Investment as a share of GDP grew from a low of 9.7% in early 1992 to 13.0% at the end of the third quarter of 2000. The 1990s were, in essence, the mirror image of the 1980s, a time in which investment fell as a share of GDP from a high of 13.2% in the first quarter of 1980 to its low in 1992 (see figure above). But by the end of the second quarter of 2002, two-thirds of those gains had disappeared.

With economic growth continuing at a slow pace, investment is unlikely to change course in the near future, leading to possibly even less investment relative to GDP. Given its present trajectory, the current decade may, in fact, become the mirror image of the 1990s, with a continuous decline in investment relative to GDP.

This week’s Snapshot by EPI economist Christian Weller.

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