The Engines of Economic Growth

A look at different sectors’ contribution to economic growth.

We know that economic growth has been lackluster for several years. Why is this happening? One way to address the question is to look at different economic sectors’ contribution to overall growth. The figure below looks at overall economic growth since 1950 (top panel), and four sectors’ contribution to that growth:

  • Private consumption, which includes purchase of services and consumer goods by non-government enterprises
  • Private investment, which includes non-government actors’ purchases of equipment, buildings, intellectual property, and residential homes
  • Net Exports, which is total exports minus imports
  • Government Consumption and Investment, federal, state and local government’s consumption and investment.

Data come from the Bureau of Economic Analysis.1

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Some points of note:

Consumption-Driven Economy. Economic growth is primarily driven by consumption spending by both households and businesses. Until the 2008 crisis, private consumption contributed between two and three percentage points of GDP growth every year. Since 2008, mean private consumption has been about one percentage point lower than the historical norm. Our present economic slowdown is substantially driven by the fact that people and businesses are not consuming as much as they did earlier.

Private Investment Low for Years. The present economic slowdown is also partly attributable to the fact that private investment is lower. People aren’t buying as much equipment or building as many buildings as they had in past decades. Interestingly, private investment has been generally low for the better part of the past 15 years. This dip in private investment preceded the Great Recession.

This low investment level is noteworthy, as many of the pre-crisis 21st century’s tax cuts and deregulation were sold to the public as a means of stimulating prosperity by inducing more investment. Investment was a much more important engine of prosperity in the 1990s, possibly due to investments in IT equipment (equipment purchases surged from 1993-2000). By the 2000s, private investment dropped substantially, despite the fact that economic policies had pressed tax cuts, financial deregulation, and other policies that were sold as spurring the economy by promoting investment.

Trade a Minior Contributor. Net exports have generally made only minor contributions to overall economic growth. It has not been an engine of economic prosperity over the entire post-WWII era.

The Effects of Austerity. This series was particularly interesting. During the very prosperous 1950s and 1960s, public sector consumption and investment made large contributions to economic growth, providing just under one percentage point of economic growth. Government spending fell during the 1970s, alongside general economic growth. After the crisis, government spending has on average been a source of stagnation – it has lowered GDP growth. This illustrates the argument that austerity is hurting the economic recovery.

The table below presents mean percentage point contributions to overall GDP growth by decade, across sectors, from 1950 to 2014:

Sectoral Contribution to GDP Growth, in Percentage Points, 1950 – 2014

Sector 1950s 1960s 1970s 1980s 1990s 2000-7 2008+
GDP Growth 4.1% 4.3% 3.2% 3.4% 3.5% 2.5% 1.1%
Private Consumption 2.2% 2.6% 2.0% 2.2% 2.4% 2.0% 0.9%
Private Investment 0.8% 0.8% 0.8% 0.7% 1.2% 0.3% 0.02%
Net Exports -0.08% 0.04% 0.3% -0.2% 0.4% -0.4% 0.3%
Government Consumption & Investment 1.1% 0.9% 0.2% 0.7% 0.2% 0.4% -0.02%

  1. Bureau of Economic Analysis (2015) “Table 1.1.2. Contributions to Percent Change in Real Gross Domestic Product” Data table downloaded June 7, 2015 http://www.bea.gov/itable/

Download the raw data and Markup file here

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