Residential Construction and Government Purchases Are Much Bigger Trailing Sectors than Business Equipment
Then in late 2008 the economy falls off a cliff: business investment in equipment and software collapses, housing investment collapses further to far below any equilibrium level, and exports collapse. Exports and business equipment and software investment start to recover in the third quarter of 2009. If only their good recovery performance had been matched by a recovery in residential investment and an increase in government purchases, we would due fine.
But there was no recovery in residential construction. There was no increase in government purchases. And starting in 2010 the shrinking government sector puts additional downward pressure on the economy.
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Economist Brad DeLong nails it. Take a look at the charts. What is holding back economic recovery? The real estate development industry is still in a state of collapse, and governments at all levels are cutting back and laying off workers.
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