Calculated Risk on private investment, GDP and the business cycle

Wonkishness warning: Very high.

Calculated Risk has a great post today: Private Investment and the Business Cycle

The post shows that while private investment typically only accounts for about 15% of GDP, it plays an outsized role in economic recoveries. (Private investment dropped so far that it currently is only accounting for about 12% of GDP, according to CR.) Private investment has four components: residential investment, investment in non-residential structures, private inventories, and investment in equipment and software.

There are four graphs in the post, but I’m only using one of them here.

First the bad news. A) Take a look at how all four categories of private investment plunged during the 2007 to 2009 recession. I have assiduously avoided using the term “Great Recession,” but there’s really no slowdown in recent decades that compares in terms of depth or length. And B) private inventories are likely to be a drag on GDP in 2012.

But there’s some really good news here. We’re almost certainly going to see the other components of private investment — residential investment, nonresidential investment, and investment in equipment and software — make positive contributions to GDP in 2012.