Private investment contribution to GDP over the business cycle — Calculated Risk

Those familiar with MMT know that the domestic private sector balance is comprised of consumption and investment and that the shifting level of business investment and firm saving is a key contributor to the sectoral balance identity, in that investment creates income, thereby adding to effective demand, while saving constitutes demand leakage. Calculated Risk investigates the contribution of private investment over the business cycle.

Discussions of the business cycle frequently focus on consumer spending (PCE: Personal consumption expenditures), but one key is to watch private domestic investment. Even though private investment usually only accounts for about 15% of GDP, private investment experiences significantly larger swings than PCE during the business cycle and has an outsized impact on GDP. Note: currently private investment is just over 12% of GDP - much lower than normal.

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Private Investment and the Business Cycle