The investment straw that stirs the drink

Daily Data: There's one category of spend that historically has been the drag to drag all drags. It's not what you think.

In today’s dispatch:

• research from the Dallas Fed on the factor that matters most (historically), but maybe not so much now;

• what’s the outlook (idk, but I can speculate)?

Daily Data: The investment straw that stirs the drink

---

👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. 

---

Consumer spending tends to grow before and during recessions

Researchers at the Dallas Fed showed that there was one kind of spending, in particular, that tends to evaporate before recessions happen.

And by way of throat-clearing, this isn’t actually a bearish post, so much as a partial recalibration of what sorts of stuff matters and when.

So what is that key category of spend that retreats before the doom? Is it consumer spending? Goods? Services? Manufacturing? Imports?

Nope. It’s none of those.

In fact, (and this was surprising to me) personal consumption tends to grow, both before recessions and during recessions (based on the historical averages).

• Consumption (green) grows before recessions:

  

• Consumption (green) even grows during recessions (albeit barely):

  

So personal consumption is not the leading signal or even the ultimate cause.

Private investment is the straw that stirs the drink

So what is it?

Well, what is now obvious from looking at the same charts, and the circles that I so masterfully drew, is that the key factor is private investment (blue).

Private investment is the contraction that precedes, and coincides with, a general retreat of GDP (aka a “recession”).¹

On average, private fixed investment accounted for 93 percent (or 1.6 percentage points) of the 1.7-percentage-point GDP decline in a recession.

And not just any private investment, but a very specific kind of private investment.