Econ Recon

Eakinomics: Econ Recon

There are two main issues dominating the economic discussion: inflation and recession. Economic punditry will get another bite at the inflation apple this Friday, with the release of the Personal Consumption Expenditures (PCE) price index data for July. Let’s focus on the prospects for aggregate growth.

As noted in an earlier Eakinomics, it is a mistake to anticipate that any upcoming recession will unfold like the downturn in 2020. Indeed, the pandemic recession is the outlier when compared to earlier downturns because it was driven by a sharp decline in PCE as households self-quarantined against the threat of COVID-19. Instead, the focus should be on the health of business investment spending – real (inflation-adjusted) spending on structures, equipment, and intellectual property (IP) products.

The good news is shown in the graph below. Year-over-year spending growth on structures investment remains terribly weak, but it accounts for only 14 percent of the total non-residential fixed investment. Equipment (45 percent) and IP products (41 percent) are still growing at healthy rates.



The bad news is in the next graph, which extrapolates each quarter’s growth to an annual rate. As the rightmost data points indicate, a majority of investment spending (structures and equipment) fell during the 2nd quarter. IP products weakened but remained in positive territory.



Thursday, the Bureau of Economic Analysis will release revised estimates of the data for both the 1st and 2nd quarters of 2022. If the same qualitative picture emerges, then the forward-looking focus should be on whether business spending can hold up over the second half of 2022. It is the key to growth.