Saturday, October 30, 2010

Investment Contribution to GDP: Leading and Lagging Sectors

by Bill McBride on 10/30/2010 12:30:00 PM

By request, the following graph is an update to: The Investment Slump in Q2 2009

The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue.

Investment Contributions Click on graph for larger image in new window.

Residential Investment (RI) made a negative contribution to GDP in Q3 2010, and the four quarter rolling average is negative again.

RI was negatively impacted by the slowdown in new home construction, and also because the number of existing home sold fell sharply (real estate commissions are included in RI).

Equipment and software investment has made a significant positive contribution to GDP for five straight quarters (it is coincident).

The contribution from nonresidential investment in structures was slightly positive in Q3. The details will be released next week, but I expect that oil and gas investment made a positive contribution, and hotels, malls and office investment were negative again. As usual nonresidential investment in structures is the last sector to recover.

The key leading sector - residential investment - has lagged this recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time - and this is a key reason why the recovery has been sluggish so far.