The 6.1% drop in GDP in the 1st quarter confirms that this is the worst recession since the early 1980’s. That’s overall. For business investment, including construction, it is the worst recession since the records began in 1948. For consumers, in spite of all the headlines, it is only an average plus severity recession. Consumers reduced their purchases of goods but increased their purchases of services. Investment spending is always more cyclical than consumer spending but the difference is unusually large in this recession because of how the recession started and how the federal government is trying to end it.

Consumer real disposable income — aggregate consumer purchasing power — increased 6.2% (annual rate) in the first quarter although it slipped marginally in March and is now 2.7% below the peak level last May. Consumers elected to increase their savings so they cut goods purchases 6% which aggravated the decline in the investment sector.

Gross domestic business investment dropped 51.8% in the first quarter (annual rate) and is now 31.7% below its previous peak level. The decline from the peak so far is 16% for nonresidential buildings and structures, 54% for housing and 20% for business equipment.

There are three reasons for the unusually large decline in the investment sector. The credit bubble bursting recession began abruptly last fall, forcing the necessary spending cutbacks into a very short time period. Daily monitoring of cash flows caused business managers to adjust to changing economic conditions more quickly than consumers.

The recession is worldwide because the credit market is worldwide. The even more serious recessions in much of the industrial world have a far more adverse impact on the US investment than the US consumer sector. Many durable goods manufacturers sell half or more of their products to foreign customers. The impact on the consumer sector was limited to the loss of export driven jobs.

The massive federal government efforts to end the recession since last fall have been focused on subsidizing consumption, often at the expense of capital goods. Unlike earlier recession fighting programs, the current plan includes huge payments to the consumption sector to subsidize mortgage payments and new home purchases as well as income supplement payments but does not include the business tax cuts that have typically been included in the past.

The consequence is that consumers will be in relatively good financial shape when the recession ends a few months ahead but the business sector will be in relatively poor financial condition as well as nervous about investing when numerous added business taxes are being considered in Washington. Hence, contractors and their suppliers should expect a relatively brisk initial rebound in housing and a relatively sluggish rebound in private nonresidential construction.

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11/06 - Contractors cut 62,000 more jobs in October, mostly for nonresidential building work

11/03 - Federal highway funding still “temporary”

11/02 - Housing gets another boost from Washington

10/30 - Initial jump in GDP growth will ebb

10/29 - Two cities illustrate divergence in regional economic growth

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