Friday, July 29, 2011

GDP: Investment Contributions

by Bill McBride on 7/29/2011 11:35:00 AM

According to the Bureau of Economic Analysis (BEA), real GDP is still below the pre-recession peak. The estimate for real GDP in Q2 (2005 dollars) is $13,270.1 billion, still 0.4% below the $13,326 billion in Q4 2007.

The following graph is constructed as a percent of the previous peak. This shows when GDP has bottomed - and when GDP has returned to the level of the previous peak. If the indicator is at a new peak, the value is 100%.

At the worst point, real GDP was off 5.1% from the 2007 peak. Since the most common definition of a depression is a 10%+ decline in real GDP, the 2007 recession was not a depression. Note: There is no formal definition of a depression. Some people use other definitions such as the duration below the previous peak. By that definition, using both GDP and employment, this seems like the "Lesser depression", but not by the common definition.

GDP Percent Previous Peak Click on graph for larger image in graph gallery.

This graph is for real GDP through Q2 2011 and shows real GDP is still 0.4% below the previous pre-recession peak.

Note: There are really two measures of GDP: 1) real GDP, and 2) real Gross Domestic Income (GDI). The BEA will release GDI with the 2nd GDP estimate.

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 Residential Investment (RI) made a positive contribution to GDP in Q2 2011, however the four quarter rolling average is still negative. The rolling four quarter average for RI will probably turn positive in Q3.

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

The contribution from nonresidential investment in structures was positive in Q2. Nonresidential investment in structures typically lags the recovery, however investment in energy and power is masking weakness in office, mall and hotel investment (the underlying details will be released next week).

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.

Residential InvestmentResidential Investment (RI) increased slightly in Q2, and as a percent of GDP, RI is just above the record low set last quarter.

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 (even with the weak first half, this appears correct).

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

Equipment and software investment has been increasing sharply, however investment growth only increased in Q2 at a 5.7% annualized rate - the slowest rate since investment declined in Q2 2009.

Non-residential investment in structures increased in Q2, and is just above the record low. I'll add details for investment in offices, malls and hotels next week.

Earlier ...
Advance Estimate: Real Annualized GDP Grew at 1.3% in Q2
Real GDP still below Pre-Recession Peak, Chicago PMI declines, Consumer Sentiment Weak

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