Clues: Temporal Ordering of Components of GDP

It is time now to start doing some detective work to figure out what causes recessions and then to figure out some suitable treatments and preventative measures.

A sensible first place to look for the cycle drivers are the investment components of GDP: inventories, business spending on equipment and software, business spending on structures (office buildings and factories), consumer spending on durables, and consumer spending on new homes and home improvements. These are quite likely to be volatile because they can all be postponed. You can hold on to that car for another year, and you can put off building a new home. Businesses do not have to buy that new computer today, and they can put off for a while their plans to build new offices or new factories. If we all do our postponing at the same time, we will probably have a recession, since the workers and capital that are normally used to produce these investment items may be idled, until we finish our waiting.