One reason that the United States economy produces more now than it did years ago, and more than most countries ever have, is the vast quantity of its productive physical assets: buildings, equipment, and software. Economists refer to the accumulation of these assets — new building, the manufacture of new equipment, and the release of new software — as “real investment.”
Economics’ “real investment” is distinct from the term investment in financial jargon, because the latter refers to an individual’s purchase of stocks, bonds, mutual funds, and other financial instruments that are often merely a transfer of ownership of a real productive asset from one person to another, rather than creating such assets anew.
The investment mechanism is of particular concern in this recession. We all saw the banking sector’s meltdown, which was the worst since the 1930s. For good reason, many have been concerned that real investment would suffer because of a “credit crunch”: distressed banks would no longer be willing or able to lend money to business with opportunities to build new things, put new equipment to work, or develop new software.
The chart below shows the quantity of real investment in four recessions (1981-82, 1990-91, 2001, and the current recession). The chart begins with the initial quarter of each recession (as determined by the National Bureau of Economic Research), and shows how much real investment changed from that quarter up to eight quarters later. Each recession is shown as a different color. For example, the fourth quarter of 2008 was the fourth full quarter of the current recession (indicated by a green line), by which time real investment was 7.7 percent lower than it was when the recession began (in the fourth quarter of 2007).
Normally, investment increases over time, so -7.7 percent is nothing to celebrate. But the chart shows that (so far) investment has fared better in this recession than in each of the previous four –- even though two of those (1990s and 2001) were considered “mild.” Investment was down 13.5 percent in the recession that began in 1990 — almost twice the decline experienced in 2008.
As House Speaker Nancy Pelosi and others have pointed out, the 2008 employment picture looks weak even by comparison to some of the previous recessions. However, the fact that real investment is not (yet) so weak suggests to me that a credit crunch is not a fundamental cause of this recession.