Here is a good chart courtesy of Brad DeLong’s blog on decomposing the components that contribute to GDP, going back to 2000:
Since the March 2009 low, exports and business investment have been the main drivers of growth in the U.S. Government purchases have turned negative as the stimulus measures temporarily provided a boost, and then a drag in subsequent years.
Going forward, you know our view on exports. We think global markets are showing even more signs of concern than the U.S. with regards to demand. Business investment is a bit more mixed, as the outlook varies quite a bit sector by sector. Government purchases are likely to remain weak given the debt ceiling agreement reached last year. It is more a question of how weak depending on what happens with the upcoming fiscal cliff negotiations.
Which brings us to the wildcard, residential construction. If residential construction starts to turn upward in the coming year, it might be able to offset the expected weakness in exports. We don’t think it’s likely, but domestic housing market is certainly at the root of the bull case. The Fed is aware of this backdrop as well, and it might be another reason for the Fed to focus on MBS purchases for further stimulus rather than Treasury bond purchases. Though the 30 year mortgage rate is already at all-time lows, a further push lower might be in the cards.