Friday, June 08, 2007

Bear Stearns and RI as Percent of GDP

by Bill McBride on 6/08/2007 05:26:00 PM

In a June 6th research note, economists at Bear Stearns miscalculated Residential Investment (RI) as a Percent of GDP. This error, in part, led to their conclusion:

"We think house prices, sales, and starts will begin to stabilize."
Bear Stearns, June 6, 2007
Residential Investment as Percent of GDPClick on graph for larger image.

This graph shows Residential Investment as a percent of GDP calculated correctly (red), and incorrectly (dashed purple, Bear Stearns).

It appears Bear Stearns incorrectly used the chained dollars. This is incorrect because the price deflators are different for both series (RI and GDP). The correct calculation is to use nominal dollars for both series for each period (we are calculating RI as a percent of GDP for each period, so RI is normalized by GDP).

Looking at the dashed line, Bear Stearns chief economist David Malpass recently wrote in Barron's:
"The first-quarter GDP data show residential investment just now getting back to its normal share of GDP (4.5% in the first quarter versus the 4.4% average in the 1990s)."
In fact, Residential Investment (RI) as a percent of GDP is currently 5.07% (not 4.5%) and the average in the '90s was 4.08% (not 4.4%).

Here are the numbers from the BEA:

Q1 GDP: $13,613.0 Billion
Q1 RI: $690.5 Billion
RI as % of GDP: 5.07%

I've written Bear Stearns, and I'll post any response or correction.