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Matt Yglesias links to an Economist article that features a chart by Julia Coronado of BNP Paribas:
The rate of spending increase is pretty obviously back to the pre-recession pace. The implication, according to Coronado, is that this shows there is no pent up demand. That's hard to argue with and makes a lot of sense. Spending didn't drop much or stay down long. Why would there be any pent up demand?
The chart is only slightly interesting but Yglesias' comment at the end of his post made me arch a mental eyebrow: There's your recession.
It is hard to know what Yglesias means by this comment. Does he mean the drop in spending is the cause of the recession or a symptom of the recession? My first thought was that he must mean it is merely a symptom. Why? Because Yglesias is a smart man and as is pretty obvious, spending never dropped that much and didn't stay down long. PCE - Goods peaked in September '07 at $3287.9 billion. It troughed at 3051.0 in December '08. Total drop was $236.9 billion or 7.2%. It now stands at $3356.5 billion, well above the previous peak. By the way, spending on services never really dropped.
But what about investment? Gross Private Domestic Investment peaked in the third quarter of '06 at $2352.1 billion. It troughed in the third quarter '09 at 1530.2 billion. It now stands at 1821.3 billion. Total drop was $822 billion or 35%.
So if investment peaked before consumption - by a full year - it seems pretty obvious to me that the drop in consumption was merely a symptom of a recession caused by a drop in investment. This is the same sequence of events that occurred in the 2000 recession and the 1990 recession. Oh and the recession before that and the one before that.
If we want to get out of this lousy economy, we need to forget about consumption and concentrate on fostering investment in the US. Right now, every emerging market economy is trying to slow capital inflows; they have too much capital. Economic policy should concentrate on redirecting that flow of capital to the US. It surely can't help that Fed and Treasury policy explicitly favors a cheaper dollar. That just raises the required expected return for any US investment to attract capital. If a Brazilian investor wants to make an investment in the US he must factor in the potential loss from a lower value of the dollar.
There are plenty of other factors inhibiting investment but lack of consumption isn't one of them. Lack of investment? There's your recession.
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