NCPA - National Center for Policy Analysis

Private Business Investment Key to Economic Recovery

March 2, 2011

Although the economy is showing some signs of revival, many people wonder why it has not roared back, as it did after most previous contractions.  What is to blame is the collapse of private business investment.  Until this critical component of the economy -- technically, "private domestic business net investment" -- fully recovers, the economy will continue to sputter, says Robert Higgs, a senior fellow in political economy with the Independent Institute.

  • Net private investment reached its recent cyclical peak in the third quarter of 2007, when firms were investing at a net annual rate of $463 billion per year.
  • Net investment then fell steadily for the next four quarters, reaching $336 billion in the third quarter of 2008 and plummeting to $159 billion in the fourth quarter of 2008, a 53 percent drop in a single three-month period.
  • Although the financial-market panic that flared up in September 2008 began to subside early in 2009, net investment continued to fall, going into negative territory (minus $53 billion annually) in the first quarter of 2009 and falling further to minus $119 billion in the second quarter of 2009.

The critical point is that private net investment is currently occurring at a rate too low to sustain rapid economic growth, says Higgs.  In the most recent quarter, October-December 2010, it was still less than a third of its 2007 peak rate.  For the entire year 2010, it was down 60 percent from its peak.  Unless private investment recovers more rapidly, the economy's recovery is sure to remain slow, too slow to significantly lower unemployment.

Source: Robert Higgs, "Why Boom Is a No-Show: A Lack of Net Investment," Investor's Business Daily, February 24, 2011.

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