Friday, January 28, 2011

Residential Investment near record low as Percent of GDP

by Bill McBride on 1/28/2011 11:52:00 AM

A couple more graphs from the GDP report, and the final consumer sentiment for January ...

Residential Investment Click on graph for larger image in graph gallery.

Residential Investment (RI) increased slightly in Q4, but as a percent of GDP, RI is near a post-war low at 2.24% - essentially unchanged from Q3.

Some people have asked how a sector that only accounts for 2.2% of GDP could be so important? The answer is that usually RI accounts for a large percentage of the employment and GDP growth in the first year or so of a recovery (and increases in RI have a positive impact on other areas like furniture, etc). Not this time because of the huge overhang of existing vacant units.

I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

I expect RI to increase in 2011 and add to both GDP and employment growth - for the first time since 2005!

non-Residential InvestmentThe second graph shows non-residential investment in structures and equipment and software.

Equipment and software investment has been increasing sharply, although investment growth slowed in Q4 to a 5.8% annualized rate.

Non-residential investment in structures is near a record low and will probably stayed depressed for some time. I expect non-residential investment in structures to bottom later this year, but the recovery will be very sluggish for some time with the high vacancy rates for offices and malls.

Consumer Sentiment The final Reuters / University of Michigan consumer sentiment index for January was at 74.2. This was up from the preliminary report of 72.7, and down from 75.2 in December.

This was slightly above the consensus forecast of 71.3, but the level is very low and well below the pre-recession levels.