by Calculated Risk on 4/26/2007 02:57:00 PM

Update: add Defense spending vs. investment (note: graph scale kept the same to compare two graphs. YoY change in defense spending during Korean War went off graph). Oops, I switched the colors for investment spending. Sorry. Red in first graph is shown as blue in the second graph.

As a preview to the Q1 2007 GDP report to be released tomorrow, here is an historical look at private fixed investment vs. recessions.

"[A] major area of concern in the near-term outlook, and one that perhaps could pose noticeable downside risks, is business investment."
Fed Governor Frederic S. Mishkin, April 20, 2007

Click on graph for larger image.

This graph shows the YoY change in real GDP and Private Fixed Investment through Q4 2006; shaded areas are recessions. (Source: BEA Table 1.1.1)

A couple of observations:

1) Since 1948, private fixed investment has fallen during every economic recession.

2) Private fixed investment has fallen 13 times since 1948 (14 including the current slump), with only 10 recessions.

So what happened during the periods around 1951, 1967 and 1986 to keep the economy out of recession? These are the periods when private investment fell, but the economy didn't slide into recession. The answer is generally the same for all three periods: a surge in defense spending. The defense spending in the early '50s was due to the Korean war, in the mid '60s the Vietnam war, and in the mid '80s a general defense build-up helped offset a small decline in private investment. The mid '80s also saw a surge in MEW (mortgage equity withdrawal) that also contributed to GDP growth.

Tomorrow I'll add Q1 2007 and break the investment data down by category.