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.
The first graph shows the real annualized change in GDP and private investment since 1960 (this is a 3 quarter centered average to smooth the graph).
GDP has fairly small annualized changes compared to the huge swings in investment, especially during and just following a recession. This is why investment is one of the keys to the business cycle.
Read more...Calculated Risk: Private Investment and the Business Cycle